UN DSG: Keep goal of 1.5°C alive by closing climate finance, mitigation gaps with urgent, robust action

Following are UN Deputy Secretary-General Amina Mohammed’s closing remarks, as prepared for delivery, to the Commonwealth Heads of Government Meeting’s Climate Change Side Event “Keeping 1.5 Alive — the Glasgow Climate Pact and Building Momentum towards the twenty-seventh Meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change”, in Kigali today:

We are at the mid-point between the twenty-sixth Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) and COP27. The Glasgow Climate Pact, the main outcome of COP26, laid bare huge gaps on mitigation, on finance and on adaptation as well as the actions that needed to be taken over the course of the coming years to close these gaps through just transitions. Let us be frank, almost sixth months after Glasgow, we are off track. Today we have heard that there is political will behind the Glasgow Climate Pact, and renewed commitment to deliver the Paris Agreement.  But, this intent is not translating into action.

Last year, global emissions were at their highest level ever. The nationally determined contributions submitted last year would result in an increase in global emissions of 14% by 2030.

Science tells us that, for us to be on a credible pathway to limit global average temperature rise to 1.5°C, global emissions need to decline by 45% below 2010 levels by 2030.

The battle to keep the 1.5°C goal of the Paris Agreement alive and prevent the worst impacts of the climate crisis will be won or lost this decade. With each passing day of inaction, the pulse of the 1.5°C goal gets weaker and weaker.

At Glasgow, all countries agreed to revise and strengthen their nationally determined contributions.  Group of 20 (G20) nations account for 80% of global emissions. Their leadership is needed more than ever to bend the global emissions curve towards 1.5°C. Thanks to the COP26 President Alok Sharma for the continued leadership.

On finance, the $100 billion commitment made over a decade ago remains unmet, and the trillions needed to ensure a low-carbon, climate-resilient future are yet to be mobilised.

Developing countries continue to face extraordinary barriers to accessing the finance they need, particularly to protect themselves from the worst impacts of climate change which are happening now.

This story plays out against a devastating backdrop. According to the Intergovernmental Panel on Climate Change, at 1.5°C of warming, people living in Central and South America, most of Africa, small island developing States and South Asia, are 15 times more likely to die from a climate impact. The recent climate discussions in Bonn did not reflect the reality of this emergency.

We have six months to Sharm el-Sheikh. The window to demonstrate that the countries are taking serious steps, as agreed in Glasgow, has not yet closed. We still have hope that it can be done.

This means countries bringing forwards new and enhanced nationally determined contributions, underpinned by concrete policies.  Especially from those that have not yet done so, and those major emitters that are not yet on a 1.5°C pathway. We need to go a step further. And this is why the Secretary-General has called for coalitions of support around key emerging economies to accelerate the transition away from coal.

It means donors providing clarity on when and how the $100 billion promise will be met, as well as providing the road map for the doubling of adaptation finance. It is a handshake that is not only fair but that will also help address the trust deficit. It also means multilateral developing banks playing their part in mobilising the trillions of needed private finance. We need to see concrete progress towards reforming rules around eligibility and burdensome access criteria that many developing countries face.

Local solutions need to be supported. Loss and damage needs to be seriously addressed. Youth need to be taken seriously and meaningfully engaged.  We must keep focused on protecting the most vulnerable.

This is why the Secretary-General has called for 100% coverage of early warning systems over the next five years.

One out of every three persons in world is not covered by an early warning system. These persons are predominately in least developed countries and small island developing States. This is unacceptable when we know we have the technology and the tools to achieve this.

Multilateralism is under strain, yet the Commonwealth has the potential to lead the way and provide a model for cooperation. You are a diverse group of countries, spanning many regions of the world, languages, religions and cultures. You include major economies, both developed and developing. You include those already suffering from the impacts of climate in action. And you unite around common values.

So, today, I end with this appeal to you, Commonwealth leaders. Let us not step back from our commitments and revert to the lowest common denominator.  We must close the gaps on mitigation, adaptation, finance and on loss and damage with urgency and ambition.

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Insights on food innovation and related investment opportunities

Thought leaders from Franklin Templeton and its specialist investment managers weigh in on the challenges and opportunities facing the food and agriculture sector of the future

The Franklin Templeton Institute released its latest insights paper, “Food innovation: Investing to feed our future,” focusing on the innovation and investments needed to feed a growing global population in the face of climate change and geopolitical conflict. The paper features perspectives from a variety of Franklin Templeton experts. Highlights of their remarks include:

Over the coming decades, investors, asset managers and researchers will be increasingly focused on the challenge of feeding a growing global population in the midst of climate change, geopolitical shocks and uncertainty. It is clear to Franklin Templeton that innovation in food and agricultural technology will be necessary to boost agricultural productivity and the nutritional value of food while reducing the negative impacts of agriculture on the environment. 

The war in Ukraine is a stark reminder of the geopolitical risk in agricultural supply lines. This crisis arrived on the heels of Covid-19 pandemic-induced inflation, which has increased food prices over 30%, creating an additional US$42 million in monthly costs to feed vulnerable populations. Asset managers have a responsibility to actively identify opportunities and risks in the financial markets, to protect clients’ assets by generating, sustainable risk-adjusted returns. Understanding investment and impact is what sustainable investment is all about: taking care of people, the planet and prosperity. Food is essential to each.

The future of food, including the innovation and technology that will be needed to safely produce and distribute the food we need, will impact global investors across asset classes. The necessary innovations in the food industry must be financed. Whether it be funding for improving traditional farmers’ production, the move to high efficiency indoor agriculture, startups developing alternative proteins, or helping companies build supply-chain resilience, all will require large capital inputs from equity, fixed income and private markets. In equities alone, food makes up US$4.9 trillion, or approximately 4% of global market capitalisation. Further, it is critical that carbon trading and carbon markets also developed as soon as possible.

As emissions continue to grow and global temperatures continue to rise, higher carbon dioxide levels in the atmosphere reduce nutrient levels in foods. Mitigation of these trends will require a broad range of solutions, including addressing issues around policy, land use, diet, waste, subsidies, and trade agreements. At the same time, the food system is highly complex and interconnected, and deployments of capital must consider unintended consequences. Changes in the system create ripple effects that have long-term impacts and can lead to severe disruptions.

As we invest in innovation to help reduce negative externalities, it will be necessary for investors to more effectively measure and price environmental impact. The economic value of natural systems and the risks to these systems’ further degradation must be accounted for in asset pricing. Half of global GDP has significant risk exposure to changes in nature. It is estimated that this transition will generate US$10 trillion in additional business revenue and cost savings and over 395 million jobs by 2030, of which US$3.6 trillion and 191 million jobs are directly related to changing the food system. For investors, there are opportunities to help fund the global economy’s transition to a nature-positive economy.

The banking sector has a key role to play in managing and mitigating the impact of the food supply chain on biodiversity and climate change. The global food system is responsible for 70% of global water use, over 50% of biodiversity loss and over 33% of greenhouse gas emissions contributing to climate change. Banks provide a wide variety of finance to companies involved in agriculture and food supply chains, including term loans, trade finance, revolving credit and project finance. We are seeing that some of the leading banks are recognising their impact on the food system in their approach to agricultural lending activities. We believe that banking leaders will seize the potential investment opportunity in this space while also effectively managing risks associated with the food sector.

Banks can further incentivise change by setting eligibility criteria that preclude the conversion of forest or ecosystems. These conditions can be applied retrospectively, by looking at what producers have done and removing eligibility as appropriately, or prospectively, by applying a penalty interest rate once the loan has been received. Further, supply-chain financing can have a broader influence with buyers or financiers supporting “conversion-free” supply chains, whereby they choose to buy or finance only those agricultural commodities that are not linked to deforestation or conversion of other ecosystems.

Banks will need reliable and robust biodiversity data to enable target setting, and there is a real need for more streamlined biodiversity-related key performance indicators. We are encouraged by the development of reporting frameworks, including the Principles of Responsible Banking (PRB) and the Task Force on Nature-related Financial Disclosure (TNFD), which will facilitate lenders and investors to make more informed assessments on the risks and opportunities associated with the food supply chain.

A productive and sustainable agricultural system starts with rebuilding healthy soils through nature-positive practices, representing cost-effective, sustainable, and scalable ways to sequester carbon and generate positive ecosystem benefits. Regenerative agriculture is centered around practices that promote soil health, crop diversification and human health. The Croatan Institute estimates that regenerative agriculture could mitigate up to 170 gigatons of CO2 emissions and generate nearly US$ 10 trillion in net financial return over the next 30 years. More than US $700 billion of financing is needed to scale these agricultural solutions in the United States over the next 30 years, representing a significant opportunity for investors to invest in a more sustainable food system.

Due to the transition period required to rebuild soil health, the investment opportunity for regenerative agriculture is primarily concentrated in private markets.  This includes real asset strategies that acquire conventional farmland to be transitioned to regenerative or organic, as well as venture and growth equity funds that invest in innovations to support the scaling of regenerative practices across the value chain in areas as diverse as soil monitoring sensors, biologics, marketplaces, satellite technology, regeneratively-grown food products, and more.  While there are no cure-all solutions, it is critical to transform the agriculture and food system toward nature-positive solutions to help manage risk, meet our climate targets and preserve the environment for future generations.

There is a common misconception that Gulf Cooperation Council (GCC) states are behind the curve in terms of applying environmental, social and governance (ESG) practices, but we see that GCC states are making progress in areas such as carbon emissions and food security, presenting unique opportunities for investors.

We believe GCC markets are better placed than most in terms of adopting ESG protocols because the largest emitters of greenhouse gases – national oil companies and utilities – are government owned. This gives governments much more control in terms of implementing necessary technological upgrades and regulatory changes. Initiatives such as seawater harvesting, soil improvement techniques, microalgae production and groundwater conservation have all played a part in improving food production in the region.

Despite the bold and ambitious policymaking and programming, the GCC is still only 31 percent food secure, on average, and storage and transportation of locally cultivated produce is still very inefficient. It is estimated that US$200 billion of investment is required annually until 2050 to meet the GCC food supply and demand gap. These investments are needed across the full value chain, including capital to improve efficiency gains, technology and the development of novel processed food. Investments will also be needed to support better logistics, help reduce waste across the system and improve storage capabilities. We see that there is an opportunity to invest in companies applying technologically advanced production and farming technologies to disrupt the region’s alliance on imported food.

Like clean energy infrastructure before it, vertical farming will mature into a defined real asset sector that will be a part of well-diversified portfolios. Over the next several years, vertical farms will create alternative use cases for underutilised land and vacant buildings, and create opportunities to drive lasting social and environmental impact.

A confluence of powerful short-term and long-term market factors give vertical farms the potential to become a major disruptor in the food and agriculture space. The global population is growing, the supply of arable land is shrinking, weather patterns are becoming far less predictable, eating habits are shifting and demand for sustainable products is growing. We need solutions that increase yield; use less water, chemicals and land; and reduce our dependence on long, wasteful and complex food supply chains. Vertical farming promises to not only increase global food security, but also to provide forward-thinking investors with strong opportunities to bring scale to this burgeoning space.

For investors, large-scale emissions reductions in agriculture from developing technologies are a long way off from monetization, but plant-based food categories look to be growth stories, and in many cases, these foods are getting a push from large consumer staples names.

Changes in consumer preference are already reducing the harmful climate effects of cultivating beef, as the shift in consumption from beef to chicken has already resulted in less land used for meat production. Changing consumer preference is also relevant in the milk arena, where consumers have been gravitating toward replacing almond milk and soy milk with oat milk. For any diet-based strategy geared toward lowering carbon emissions, consumer taste will continue to be a critical variable in growing this space.

Two goals of COP26, the United Nations (UN) Climate Change Conference included curtailing deforestation, with Brazil as a focus, and building resilient agriculture. Brazil’s beef industry has faced pressures over deforestation as supermarkets and consumers steer clear of beef linked to the demise of the Amazon rainforest. The ability to trace cuts of beef to a single animal and ranch within Brazil, including tagging cattle with chips after birth to digitally track movements, will be crucial for minimising revenue losses and reputational damage from food safety concerns. Without digital traceability, Brazil’s largest meatpackers face potential bans from markets like Europe and potentially China.

A global carbon market would give Brazil’s government a tangible monetary incentive to enact more climate-friendly policies that will limit deforestation. A global carbon market that confers monetary value to forests and farmland soils could benefit not only Brazil and the Amazon, but also rainforest countries, such as Indonesia.

Challenging weather conditions have impacted food production and resulted in increased consumer prices across the globe. Sustained commodity price increases have demonstrated the need for a more stable food supply and present investment opportunities for credit issuers who can lead with innovative solutions to meet rising global demand and consciously work to mitigate the social impact of climate change.

Credit issuers should work to provide local farmers with education and capital investments, possibly in the form of micro loans or other local partnerships to implement best practices in land management, water efficiency and crop resiliency. Credit investors would be able to earn an investment return while also contributing to overall increased agriculture sustainability and reduced greenhouse gas emissions through lower tilling needs, improved crop resiliency and increased farmer profitability.

One of the biggest opportunities for companies to mitigate the risk of higher input costs resulting from shrinkage of supply-induced impacts related to climate change is by investing in agricultural innovation and technologies that support more sustainable land practices, more resilient crops and higher crop yields. The debt capital markets currently provide some of the best investment vehicles to address the wide scale mitigation of climate risk in our food supply.

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Why investing in the planet should be everyone’s business

The devastating effects of the floods in KZN can easily be viewed as one of the most recent indications of climate change, which is becoming ever-more difficult to ignore. The finance sector in South Africa has an important role, in not only helping to alleviate the impact of these events for their clients, but also implementing internal policies to generate profound and lasting solutions to prevent the escalation of climate change.

“Africa faces many socio-economic challenges in which banks must play a progressive role in terms of start-up funding, SMME support and the introduction of innovative practices aligned with new technologies. At Nedbank, we also view climate change as a major investment focus. It’s as much a business reality as it is an environmental challenge. We believe all organisations must place the preservation of the planet higher up on their corporate agenda and instil an internal culture of sustainability, “says Mark Boshoff, Head: Strategic Initiatives and Specialised Asset Finance at Nedbank.

Every large organisation has the means to impact change – with their staff compliment being an obvious asset. These comprise thousands of people for whom sustainable business practices have a direct personal bearing. They have a vested interest in being at the forefront of a company’s mission to make a difference in mitigating climate change. Organisations committed to preserving the planet therefore can and must galvanise their people to view the protection of it as a business imperative.

“Without doubt, the continent faces numerous sustainability challenges. However, if embraced and leveraged, there are ways to help to build a more resilient, equitable and transformed continent. At Nedbank our mission is to create a workforce that is inspired by taking on the challenges faced by our clients, “says Boshoff.

The support and financing of renewable energy sources in Africa is just one example of turning a challenge into an opportunity. Additionally, investors, shareholders, employees, consumers and society are demanding responsible consumption and business practices and the finance sector should not only heed the call but also be a voice for change. This starts within.

Humans and Resources

Now is the time to attract and retain employees aligned to eco-friendly business practices, educate staff to recognise entrepreneurs with innovative sustainability ideas and to implement internal policies that reinforce the all-important mission of putting the planet first.  Sustainability goals must be embraced by Human Resource departments that actively recognise the need to advocate the company’s environmental policies, using their expertise in communicating and instilling behaviours and policies. Meaningful training material and ongoing outreach programmes can further entrench an organisation’s environmental mission – and inspire its people to participate not only as an employee but a proactive global citizen.

Products and the Planet

Shareholders and investors are increasingly considering companies with good track records in ESG as investment targets while disinvesting in those with the reputation of polluters and displaying exploitative strategies. Customers and clients like-wise are considering purchases of services and products from companies with better track records. These factors alone should already inspire the creation of products for the greater good. After all, developing offerings that attract sustainability-conscious clients benefits all. The support of businesses engaged in areas such as eco-packaging, e-waste, renewable energy, regenerative procedures in agriculture, or sustainability-linked financing is a win for the economy and the planet. Fostering a virtuous circle where corporates, communities, small businesses, suppliers, and manufacturers work together for all to benefit, has to be the future.

Home and Away

Whilst initially a necessary measure imposed by the pandemic, the rise of hybrid working environments also presents an opportunity.  Flexible workplace models should be considered in terms of the larger sustainability mission. Employees can massively limit their carbon footprint, reduce traveling times, improve well-being and attract commerce to residential areas to the benefit of communities.

Ultimately, climate change will increasingly impact businesses and supply chains, and most importantly the lives of everyone on the continent. Government’s environmental policies will make a difference but companies can play a vital role in creating change from within. Through planet-first corporate models, the financing of sustainability-focused businesses, the introduction of eco-friendly office practices, including recycling and energy-efficient solutions, employees can be inspired to bring the vision home.  It’s only then, when more people will work together towards the vital collective mission of seeing the planet as our greatest asset., “concluded Boshoff. 

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Over 75% of bitcoin miners’ income is going to electricity costs

Elizabeth Kerr

Bitcoin (BTC) mining is central to the sustenance of the BTC ecosystem. Besides enabling verification of transactions, it helps secure the network. The activity is so critical that the BTC network incentivises miners in the crypto through the miners’ reward. That said, it is proving to be expensive, with miners having to dig deep for electricity costs.

CryptoMonday has been studying data on BTC mining. The site concludes that miners’ incomes are dwindling owing to soaring electricity costs. It reckons that over 75% of BTC miners’ income goes to meeting electricity costs.

Jonathan Merry, CryptoMonday’s CEO, has been discussing the data.BTC mining is a very electricity-intensive process. A study has shown that a single BTC transaction consumes about 2165 kWh of electricity. That’s what a regular American household would use in 74 days! Factor in the roughly $0.14/kWh that an average household pays, and the magnitude of expenditure becomes evident.Jonathan Merry

BTC’s Proof-of-Work Consensus (PoW) Conundrum

One of BTC’s core features, its proof-of-work (PoW) consensus mechanism, is also every miner’s headache. PoW requires them to solve complex equations for a share of newly mined coins. The equations require the use of specialized mining equipment with high computational power. The equipment consumes tons of kilowatt-hours (kWhs), ballooning the miners’ electricity bills.

BTC’s mining difficulty further compounds the situation. BTC gets its value from its scarcity. Thus the system makes it progressively difficult for miners to complete their tasks. This forces miners to invest in mining equipment with even higher computational ability. And as indicated earlier, these come with hefty power bills.

BTC’s Carbon Footprint

PoW has also come under criticism for its environmental footprint. Critics hold that it is a wasteful and unsustainable crypto for the universe. Again, studies have shown its carbon emissions to match those of entire nations. One of them estimates that BTC emits nearly 114 megatonnes of CO2 annually, a value comparable to Czech Republic’s.

Such figures raise concerns about the king crypto’s sustainability. Bitcoin is hardly mainstream, but it’s already registering a significant carbon footprint. That reality is what’s worrying its opponents. They claim that the broader adoption of the coin would significantly impact the global environment negatively.

Addressing BTC Energy and Environmental Concerns

Despite strong opposition from some quarters, BTC enthusiasts still believe in the crypto’s value. They hold that notwithstanding the environmental concerns its usage raises, humanity has a lot to benefit from its wider adoption. They further contend that BTC’s footprint is lesser than that of the traditional banking systems or idling appliances at home.

Besides, Bitcoinners hold that the industry is still in its infancy. As such, one would expect heavy investment in machines, some of which may be inefficient. But with its maturing, there’s bound to be an evolution of the mining equipment to make them energy efficient.

Greening Bitcoin

Moreover, some miners have made the switch to fully renewable energy sources. Others are in different stages of that transition. Transiting to greener and affordable alternatives should help allay environmentalists’ fears.

Other quarters have suggested a complete shift to a less energy-intensive consensus mechanism. One of the popularly touted ones is Proof-of-Stake (PoS). PoS is less energy and hardware intensive and will allow verification of transactions on everyday appliances like phones and PCs.

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Wind industry welcomes presidential support of accelerated energy transformation

Responding to President Ramaphosa’s address on the budget vote (9 June 2022), the South African Wind Energy Association (SAWEA) applauds the president’s unequivocal support of the energy sector’s transformation. Furthermore, the industry welcomes the presidency’s clarity of the various reforms.

Fundamentally, the Association points out that the reforms and work underway will deliver a robust, competitive energy sector with multiple generators competing to supply electricity at the lowest cost and selling power directly to customers, which will go a long way in supporting local business and South Africans individually. 

“This is a historical moment in our country as we are recreating not only our energy generation sector, but providing stable foundations for economic growth that is in line with the National Development Plan which sees 2030 as a time when South Africa will reduce its dependency on carbon,” commented Niveshen Govender, SAWEA CEO.

The President clearly outlined the work underway aimed at increasing the energy availability factor (EAF), and closing the electricity gap between generation and demand, which is the root cause of load shedding. These included ensuring that projects from existing procurement programmes, including Bid Window 5 of REIPPPP, reach financial close and are connected to the grid as quickly as possible; accelerating private sector investment in generation capacity under 100 MW; enabling Eskom to purchase surplus power from existing power producers; supporting municipalities to procure power independently; and encouraging households and businesses to invest in small-scale solar power installations and feed energy to the grid, amongst others.

“The interventions are in line with the RE sector advocacy efforts. We believe that this step change that we are experiencing will alleviate the impact of power disruptions and allow us to build back better. While these are ambitious intervention, strong leadership is required to move us forward,” added Govender. 

 The wind sector is excited by Cabinet’s approval of the appointment of Jacob Mbele as the new Director-General (DG) for the Department of Mineral Resources and Energy, as announced by Minister Mondli Gungubele, yesterday. On behalf of its members’ SAWEA welcomes Mbele, who is currently a Deputy Director-General for general programmes and projects at the department, noting that he has been intimately involved with both the Integrated Resource Plan and the procurement of electricity from independent power producers for many years, and wishes him well on his journey to drive and support the energy transition in a fair and equitable manner.

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The reality of SA’s electricity crisis

South Africa’s power sector is navigating an almost perfect storm of a growing electricity supply deficit, exacerbated by Eskom’s deteriorating generation because of increasingly unreliable coal plants, resulting in skyrocketing electricity prices. Together these forces are crippling the economy.

With the country emerging from a Covid-induced economic slowdown over the past two years, it is becoming clear that we have been lulled into a false sense of progress regarding the rollout of new energy generation. The stark reality of the situation is alarming, with almost weekly load shedding and the possibility of stage 8 recently mentioned by the government. We are on track to break another record for the worst year of load shedding. By Eskom’s own admission, load shedding so far for 2022 has already exceeded their predictions and is set to worsen in the months ahead.

Figure 1: Hours of load shedding from 2014 to 2021[1]

Given the delayed roll-out of the emergency power procurement plan, which was set to start a year ago and due to come online this month, Eskom has been forced to rely even more heavily on its diesel-fueled generators, at an enormous cost to the utility. South Africa also faces growing pressure to transition to clean energy to meet environmental commitments and avoid punitive international trade terms.

Key questions that need to be answered are: What has been done to address this situation? Will the current plans be enough, and how could the country accelerate the power sector’s reform?

PLANNED INTERVENTIONS: BUT ARE THESE ENOUGH?

South Africa’s successful Renewable Energy Independent Power Producer (REIPPP) programme over the past 10 years and planned reform of the power sector and transition to cleaner energy has been internationally recognised and achieved significant support.

Since 2019, the government has announced several notably bold plans, given the country’s historical reliance on Eskom’s centralised command and control of electricity supply. These have included:

  • Eskom’s unbundling and energy sector reform in September 2019 (“Roadmap for Eskom in a Reformed Electricity Supply Industry”).
  • Updated Integrated Resource Plan (IRP-2019) in October 2019, which outlined the planned electricity procurement over the next 10 years and the transition in the energy mix towards renewables.
  • Launch of Emergency Power Procurement Plan (RMIPPPP) in 2020 and announcement of RMIPPPP preferred bidders in March 2021.
  • The resurrection of the REIPPP programme, with the launch of Bid Window 5 in April 2021 and the announcement of preferred bidders in October 2021. It follows a hiatus of procurement from Independent Power Producers since Bid Window 4 was announced in 2015.
  • Government’s move to unlock private power generation and grid access by lifting the Nersa licensing threshold to 100MW in August 2021.
  • Local research and the development of green hydrogen and battery storage, technologies that are globally acknowledged as key to power generation in the future.

Over the last six months, plans by Independent Power Producers have been complicated by an international supply backlog in the equipment required to build new power plants, together with a significant increase in shipping and insurance costs.

Unfortunately, the delays and unpredictability of contracting Independent Power Producers since 2015 has almost wiped out the local supply industry, necessitating a measure of foreign-sourced procurement. However, there is optimism about re-igniting the development of the local supply sector, given the amount of renewable energy set to be rolled out over the next 10 years. 

MUCH HAS BEEN ACHIEVED ON PAPER

In theory, much has been achieved in terms of the intention to reform the energy sector and unlock new sources of electricity supply. In summary, the following steps to take electricity generation forward have been made:

  • RMIPPPP: 11 Independent Power Producers were awarded almost 2 GW of new power contracts more than 12 months ago, but only three are nearing financial close.
  • REIPPPP Round 5: 25 Independent Power Producers were awarded 2.6 GW of new power in August 2021 in the most heavily contested bid window, resulting in the lowest tariffs awarded so far in South Africa.
  • Private power generation: dozens of projects totaling some 4 GW are in the pipeline for registration to avail of the <100 MW embedded generation cap.
  • IRP 2019 has outlined the decommissioning of more than 10 GW of coal by 2030, replacing it with 31 GW of new power (incl 21 GW of renewables) over this period.
  • Eskom’s unbundling has progressed and the first step of legally separating its transmission operations into a separate company was achieved in late 2021.

THE REALITY OF THE SITUATION

Despite the ambitious plans and the initial steps taken, there is growing frustration with the glacial progress that is being made towards fully executing them. South Africa is one to two years behind the new power schedule outlined in the IRP 2019.

The first three projects under the RMIPPP programme concluded Power Purchase Agreements by Eskom in early June 2022, with financial close expected within 60 days, but most of the programme has stalled. Environmental issues and litigation plague the Karpowerships, and the pass-through of gas costs are now prohibitively expensive for Eskom. Many REIPPP Round 5 projects are struggling to close, given the significant price adjustments of engineering, procurement and construction contracts against the backdrop of the tight margins bid under the REIPPP programme. Private power projects are also struggling to meet Nersa’s stringent requirements – 18 projects have been registered, including 16 in April 2022, since lifting the licensing threshold in August 2021.

The capacity of Eskom’s national transmission grid is highly constrained in the Northern and Western Cape, limiting the potential for new projects to connect to the grid. Furthermore, the reliability of Eskom’s coal plants is rapidly deteriorating. The Energy Availability Factor (EAF) for the year to date has averaged less than 60%, and the trajectory is increasingly moving in the opposite direction to the 75% targeted EAF that was envisioned in the government’s plans under the “Roadmap for Eskom in a Reformed Electricity Supply Industry”. The increasing cost of maintaining Eskom’s aging assets, together with the huge cost over-runs and interventions to address design flaws of mega coal plants Medupi and Kusile, has driven up the real cost of electricity by more than 600% over the past 15 years.

Figure 2: Eskom average tariff vs. inflation (CPI)[2]

Note: The graph depicts overall average increases – actual increases will be different for different types of consumers (residential, commercial and industrial) and will vary between municipalities.

THE ROADMAP TO TURNING AROUND THIS DIRE SITUATION

  • We urgently need to simplify and fast track the registration of license-exempt projects (<100 MW) through better coordination between Nersa, Eskom, the Department of Mineral Resources and Energy (responsible for electricity procurement), the Department of Public Enterprises (responsible for Eskom) and National Treasury.
  • To assist Eskom, private concessions should be given to Independent Power Producers to upgrade parts of the grid network where they need to connect. Independent Power Producers could achieve cost recoveries if the wheeling fees Eskom charges for using its grid network were reduced.
  • To expedite the financial close of Round 5, consideration should be given to granting a one-off adjustment to the tariffs to help projects address the unexpected increase in equipment supply costs. Doing so would arguably be cheaper than the cost to the economy for every day of load shedding, plus the cost of running diesel generators by Eskom.
  • Instead of a new bidding process for Round 6 of the REIPPP programme, there could be an award of Power Purchase Agreements (PPAs) to the lowest range of bidders that missed the tariff cut off in Round 5.
  • Another update to the IRP is needed given the delays in project closings and performance deterioration in Eskom’s coal plants. This should include the increased allocation to electricity procurement from Independent Power Producers by municipalities in good financial standing, expected to be a growing factor in South Africa’s electricity sector reform in the years ahead.
  • A formal plan to facilitate the use of Eskom’s infrastructure by municipalities in good financial standing that wish to procure electricity directly from Independent Power Producers, and consumers who wish to sell power into the grid, would greatly assist in rolling out the decentralisation of power away from Eskom generation.
  • The updated IRP should include an increase in the speed and scale of developing additional renewables and battery storage.

EXECUTION OF THESE PLANS ARE THE KEY TO A BRIGHTER FUTURE

There is an urgent need to fast track the build-out of new power generation to minimise the reliance on Eskom’s coal plants and reduce the negative impacts of load shedding. Many positive factors support energy reform, including the extensive national grid infrastructure, significant amounts of private investment in the pipeline, South Africa’s vast natural resources, and global support for the clean energy transition.

The key issue is prioritising, coordinating and executing decisions that are primarily still on paper. We cannot afford further delays; this is a national emergency for South Africa. We need to do more, faster. However, inflexible regulatory paradigms restrict private sector investors who have the capital, expertise, and the will to make a difference. Significant capital investment is required to upgrade/strengthen the grid. It cannot be left up to Eskom alone and offers an opportunity for public-private partnerships that will ultimately lead to a brighter future for our country.


[1] Source: CSIR Energy Centre

[2] Source: https://bit.ly/3xu4KFa

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JSE unveils Sustainability and Climate Disclosure Guidance

The Johannesburg Stock Exchange (JSE) has released its Sustainability and Climate Disclosure Guidance that aims to promote transparency and good governance, and guide listed companies on best practice in environmental, social and governance (ESG) disclosure.

In December 2021, the bourse published the Draft Sustainability and Climate Disclosure Guidance for public comment, which paved the way for a comprehensive consultation process with a broad group of stakeholders including market participants, sustainability specialists and corporate governance bodies.

“The JSE recognises the need to create an enabling environment for better disclosure practices, especially in light of regulation and guidance that are changing rapidly globally. The Sustainability Disclosure Guidance is intended to help companies to align with recent and imminent changes in global standards and international best practice regardless of their experience in sustainability reporting,” says Leila Fourie, Group CEO at the JSE.

The JSE disclosure guidance combines global best practice with local relevance, and simplifies ESG disclosure for both listed and private companies in a context of a myriad of frameworks, guidelines, standards and ratings in the market.

Unpacking the JSE Disclosure Guidance

The Sustainability Disclosure Guidance is an impact-focused, overarching reference document that has a basic set of metrics which are rooted in existing, well-established global standards. It is the blueprint which will assist companies to understand what matters, both on a local and global landscape, and start disclosing.

Parallel to that, is the Climate Disclosure Guidance which specifically aims to clarify current global best practices in climate-related disclosure and provides a step-by-step guide to get issuers started on this journey. The guidance can be a starting point for those tasked with preparing reports with the goal of integrating climate-related information for the first time, while also providing additional resources that can help deepen the journey into climate-related disclosure for those that are more advanced.

“It is our hope that the JSE Disclosure Guidance will help to improve business leadership, performance, accountability and transparency across the entire sustainability ecosystem,” concludes Fourie.

While organisations will have the prerogative to draw fully or in part from the guidance framework to augment their existing disclosure practices, the JSE supports the understanding that the structure of any high-quality disclosure is similar for organisations of all forms and sizes.

The JSE has long championed sustainability as it was the first emerging market – and the first stock exchange globally – to introduce a sustainability index in 2004. It is also a signatory to the United Nations-backed Principles for Responsible Investment and a founding partner of the Sustainable Stock Exchanges Initiative. The JSE is also home to the existing FTSE/JSE Responsible Investment Index and launched the Green Bond Segment in 2017, which was expanded to a fully-fledged Sustainability Segment in 2020.

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Operation Vulindlela: catalyst to NERSA’s approval of 16 more distributed generation projects, streamlining water processes and national rail policy

In the water sector, Operation Vulindlela has been providing technical support to the Department of Water and Sanitation to implement a turnaround plan for the granting of water use licences, with a target to process 80% of all applications within 90 days.

by GCIS Vuk’uzenzele

The South African economy, like any other economy, cannot function, let alone grow, without efficient and competitive network industries. These industries – which include electricity, water, transport and telecommunications – are the arteries through which the oxygen of the economy runs.

Structural problems in these areas have long been cited as some of the main constraints on South Africa’s economic growth. Inefficiency and the high cost of network services are an impediment to doing business in the country.

To address and overcome these challenges, we set up Operation Vulindlela in October 2020 as an initiative of the Presidency and National Treasury to accelerate structural reforms in these network industries. While the responsible government departments and entities drive these reforms, Operation Vulindlela monitors and identifies challenges and blockages. Where needed, it facilitates technical support to departments.

The recent quarterly report outlines the progress made by Operation Vulindlela and the departments responsible for these reforms. Across government, our focus is on reforms that are fundamental and transformative; that reshape the way our economy works.

This includes the auction of high-demand spectrum for mobile telecommunications, which was delayed for more than 10 years and finally completed in March. The release of new spectrum will improve connectivity and bring down broadband costs. 

The establishment of the National Ports Authority as a separate subsidiary of Transnet last year had been delayed for more than 15 years. This was the necessary first step towards enabling private sector participation and increasing the efficiency of our port terminals.

We have also reinstated the Blue Drop, Green Drop and No Drop system for the first time since 2014 to ensure better monitoring of water and wastewater treatment quality. We have published an updated Critical Skills List, also for the first time since 2014.

These are just some examples where, by focusing effort and attention on a limited number of priority reforms, this administration has been able to drive progress.

Through Operation Vulindlela, we have also been able to take a more focused and holistic approach to reforms, ensuring better coordination where multiple departments and entities are involved.

The best example of this is in the energy sector, where a number of important, interconnected reforms are underway to change the way that we generate and consume electricity.

Milestones include the raising of the licensing threshold for new generation projects to 100MW, allowing these projects to connect to the grid and sell power to customers. We have revived the Renewable Energy Independent Power Producer Procurement Programme through the opening of new bid windows.

Changes to the regulations on new generation capacity have allowed municipalities to procure power independently for the first time. And legislative reforms will ultimately give birth to a new competitive electricity market, supported by the publication of the Electricity Regulation Amendment Bill and the work underway to amend the Electricity Pricing Policy.

The process of unbundling Eskom is on track, with the entity meeting its December 2021 deadline for the establishment of a National Transmission Company. By December this year we hope to complete the unbundling of Eskom’s generation and distribution divisions.

The quarterly report highlights a number of other important achievements, as well as areas where intensive work is underway.

In the water sector, Operation Vulindlela has been providing technical support to the Department of Water and Sanitation to implement a turnaround plan for the granting of water use licences, with a target to process 80% of all applications within 90 days.

Work is also underway to establish a National Water Resources Infrastructure Agency that will ensure better management of our national water resources.

In the transport sector, inefficiencies in port and rail have severely affected our ability to export goods. Work is underway to establish partnerships with private sector operators to invest in port infrastructure and improve the management of container terminals at the ports of Durban and Ngqura.

The White Paper on National Rail Policy, which was approved by Cabinet in March, outlines plans to revitalise rail infrastructure and enables third party access to the freight rail network. Transnet Freight Rail is already in the process of making slots available for private rail operators on the network.

A fully operational e-Visa system has been launched in 14 countries, including some of our largest tourist markets. A comprehensive review of the work visa system is also underway to enable us to attract the skills that our economy needs.

These reforms have been made possible due to better collaboration across government behind a shared reform agenda.

We call on business and investors to take advantage of the changes that are underway and turn their pledges and commitments into tangible, job creating investments.

This article was originally published in the GCIS Vuk’uzenzele.

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SA consumers are pivotal in achieving Net Zero

The phrase, “net zero” has become synonymous with global sustainability objectives and the movement to curb climate change. As the world gears up to present a united front against impeding realities like environmental degradation and global warming, many have opinions on the role that the public and private sectors have to play in driving positive change. These efforts, however, need to be supported by civil society, which holds sway over transformation on a grassroots level.

This is according to Mustafa Soylu, chief executive officer of Defy Appliances, who says that South Africans need to make the shift to conscious consumerism, reconsider their buying decisions and opt for brands and products that can visibly demonstrate their commitment to solving climate issues. “For a net-zero economy by 2050, energy efficiency is a must.

Four product groups – electric motors, air conditioners, refrigerators, and lighting – account for 40% of global electricity consumption.

Home appliances consume a significant amount of household energy. This forces us, and our industry, to take a hard look at ourselves, and reconsider our impact on the planet. As climate conditions worsen, people in developing countries will become more and more vulnerable to heat. With growing middle-classes, the demand for cooling products will only increase. Therefore, one of the most critical short-term actions is working on increasing the energy efficiency of the products even in countries where there is no current legislation that forces us to do so.”   

For Soylu, decisive and collective action by all South Africans is the only solution to lowering our country’s carbon footprint and making a meaningful contribution to the global movement against climate change. “As South Africans, we need to avoid relegating the responsibility of fighting global warming to big corporates and the government. Instead, we need to share responsibility and use education and awareness drives to filter these commitments down to consumer level, which is where change can is seen in the most tangible way.”

This change is underway, as a study by Euromonitor International suggests. According to the study, 34% of South African survey respondents indicate that they buy sustainably produced items and 49% make use of sustainable packaging. A further 32% (compared to 24% globally) say that they make donations to non-profit organisations that support and protect the environment. This shift to conscious consumerism, is a trend that is slowly but surely taking hold in South Africa, with over 70% of respondents indicating that they try to make a positive impact on the environment by recycling, saving water and reducing the use of single-use plastic.

As Soylu argues, taking actions that protect the environment have a dual benefit for South Africans who face unique energy challenges. Load shedding – which was implemented during the later months of 2007 – is still a reality more than a decade later. It is becoming clearer that energy-efficiency and the more responsible use of energy is a necessity for the millions of South Africans whose daily lives are affected in a very direct way by electricity blackouts. Furthermore, Defy is committed to helping consumers by reducing their utility bills and aiding the government’s decarbonisation goals.

“To this end, as Euromonitor International reports, almost half of South Africans are earnestly pursuing ways to reduce their energy consumption and use more efficient products. For Defy Appliances, insights such as these informed the design and development of the Defy Solar Hybrid range of household appliances that can offer an up to 35% reduction in energy use.”

The range is the materialisation of Defy’s commitment as a company to help consumers to play their part in working towards net zero, says Soylu.

“We are committed to mitigating the impact of climate change by ensuring that our production processes, our manufacturing methods and the materials we use are carbon efficient. This sustainable approach will underlie everything we do as a group moving forward. As we take action that is reflective of this commitment, we encourage consumers to vote with their money by making conscious purchasing decisions that will contribute towards a more sustainable future,” he concludes.

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Wind energy association unpacks complexities of procurement process

Responding to the announcements made last month delaying two renewable energy procurement rounds, meant to unlock and deliver new generation capacity for the country, the South African Wind Energy Association’s (SAWEA) provides insights.

June 2022

The sector in general, view the interrupted procurement as unfortunate, citing that this delays the achievement of investment, job creation and security of electricity supply that South Africa desperately needs. However, Chair of the Working Group, Kai Howie, notes that considering the complexity of the market and scale of the procurement process, it is understandable.

“We understand that these projects are complex and that given the chaos on the global manufacturing and logistics markets, as well as inevitable process delays, it is not entirely surprising that there has been a postponement to signing the agreements with the state utility and government departments, and achieving financial close where funds can be drawn down to fund the construction of these renewable energy projects,” says Howie.

BW5 preferred bidders are now expected to reach financial close by the end of next month, or late September 2022, pushed out from end-April, which was just six months after the bidders announcement in October last year. Whilst it isn’t certain which of the preferred bidders are earmarked for commercial close and financial close for the two allocated deadlines, as the discussions between the preferred bidders and Eskom are generally confidential, Howie explains that the original timeframe was actually very tight. He also explained the complexity around setting an ideal timeframe, considering the policies and pricing requirements.

“The ideal timeframe for these projects to reach financial close needs to be short enough so that pricing from suppliers and contractors can be as close as possible to the pricing that was bid on, and long enough so that all permits, consents, and the Eskom budget quote can be obtained as well as for all agreements to be negotiated and finalised,” explains Howie.

While six to twelve months may be an ideal timeframe, this is still challenging for preferred bidders considering the current international market conditions, which means that pricing cannot be locked in for significant periods. On the other hand, regulatory processes, for example, the water-use licence process, take months to complete, even with the assistance of the Presidency’s office.

Further addressing the policy and regulatory environment, Howie and his industry colleagues are looking at how processes can be adjusted to ease the pressure on IPPs.

“Firstly, the capacity of various government departments needs to be improved to ensure that requests for permits and consents can be processed as quickly as possible. Secondly, given the uncertainty and instability in the global manufacturing and logistics markets, placing full pricing risk on bidders is not conducive to projects reaching financial close. Finally, relooking at the risk allocation to ensure that there are not onerous terms which need to be passed down to suppliers and contractors could go a long way in ensuring that the projects reach financial close in a shorter period of time as this would simplify the negotiations significantly,” reports the SAWEA Policy and Markets Working Group.

The Group report that the cumbersome policy relating to commercial closure range across a number of departments, which are battling to issue permits and consents timeously. The sector has noted that the Department of Water and Sanitation has certain capacity challenges, which are being addressed to improve turnaround times.

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