International study verifies energy savings potential of Standards and Labelling Programmes – and SA is on track
The International Energy Agency (IEA) and 4E Technology Collaboration Programme (4E TCP) have released a report on the effectiveness of Energy Efficiency Standards and Labelling (EES&L) programmes. Labelling electrical equipment such as, among others, residential appliances, electric motors, streetlighting, etc. according to their energy performance helps consumers to make informed purchasing decisions, saving them billions of dollars on electricity and avoiding more than 300 million tonnes of CO2 emissions each year. The South African National Energy Development Institute (SANEDI) reports that this international study has strengthened local EES&L programmes, through knowledge gained towards implementation, which are seeing success in South Africa in line with international findings.
The IEA report draws on nearly 400 documents and shows that the longest-running EES&L programmes have saved approximately 15% of their country’s total electricity consumption. Around two-thirds of these savings are seen in the residential sector, while savings in the services and industrial sectors each account for one-sixth.
“This is exciting news for South Africa, as the study echoes the experience that we have had with our local EES&L programmes,” says Barry Bredenkamp, General Manager: Energy Efficiency & Corporate Communications, SANEDI. A recent DMRE-SANEDI-UCT research report on electricity consumption in the South African residential sector shows that electrified households consume roughly 17% of the country’s total grid electrical energy.
SA on track for improving residential energy intensity
The country’s existing National Energy Efficiency Strategy (first published in 2005) included a target to improve residential energy intensity by 10% in 2015 compared to a year 2000 baseline. The mechanisms predicted for achieving this target included S&L of household appliances. Regulations requiring minimum energy performance standards and consumer labels for large residential appliances (including laundry, refrigerators, AC, and geysers) were introduced in 2015.
Bredenkamp says “research undertaken in 2019 concluded that our local S&L programme will reduce electricity consumption by 7,1 TWh by 2030, reducing residential utility bills in total by US$1.4 billion – $54 per household. The IEA report reinforces how effective these programmes are. These reductions bring benefits to consumers as well as lower emissions and lower energy demand.”
The report’s findings are drawn from evaluation studies covering 100 countries, including those with the longest running and strongest appliance policies, such as China, the EU, Japan, and US. It confirms that well-designed policies encourage product innovation and lead to economies of scale, which reduces the cost of appliances even without accounting for the efficiency gains or reducing the size or service of the appliance.
“Notably, South Africa is mentioned in this report. This is encouraging, given that we are the world’s 14th largest global emitter of greenhouse gases, because we rely on coal for energy generation,” says Ashanti Mogosetsi, Project Manager, EES&L Programme for SANEDI.
S&L programmes seeing global success
Findings from the study speak volumes. Figures 1, 2, and 3 are drawn from the report and demonstrate the effectiveness of standards and labelling programmes. Figure 1 shows the proportion of national electricity consumption reduction percentage from S&L programmes in selected countries. Figure 2 demonstrates the annual avoided electricity consumption from these programmes (TWh/year). Figure 3 shows the annual energy reduction percentage in new-product energy consumption from EES&L programmes.
“The report confirms that improvements to the energy efficiency of appliances and equipment are some of the lowest-cost options available today for reducing energy consumption and associated emissions. They show a typical society benefit to cost ratios of four to one,” says Bredenkamp. “These programmes provide net financial benefits to individuals and the community. Other benefits, include employment, product innovation, water savings, improvements in air quality and the reduction of public expenditure on health, add to the case for stronger and more widely implemented standards and labels.
“The evidence shows that EES&L programmes can deliver annual electricity demand savings equal to the annual production of renewable energy. Regular updates of EES&L policies are required to keep them in line with technological improvements, and to drive innovation in energy efficiency. This demands due diligence, such as industry consultation, and SANEDI is eager to participate in this process. To this end, South Africa has the started the process for S&L to be introduced to streetlights, electric motors and televisions; cost benefit analyses are at an advanced stage to prove this can work in the country” says Bredenkamp.
International climate deal could solve SA’s energy and economy crisis
Some of the world’s richest nations recently met with South African cabinet ministers to discuss a climate deal that could see billions of dollars put toward ending the country’s dependence on coal.
The delegation is trying to hammer out an agreement that can be announced at the COP26 climate talks, which start in Glasgow, Scotland on 31 Oct, two people familiar with the talks said. The discussions with South Africa — the world’s 12th-biggest emitter of greenhouse gases — include representatives from the US, UK, Germany, France and the European Union.
While South Africa is under pressure to cut its dependence on coal, which accounts for more than 80% of its power generation, it needs finance to facilitate the transition to cleaner energy. Developed nations may also need to find a way to address the challenges faced by South Africa’s state-owned power utility, which is burdened by R400-billion of debt.
The envoys met with South African ministers including Pravin Gordhan, the public enterprises minister whose portfolio includes oversight of power utility Eskom Holdings, Barbara Creecy, the environment minister, andEbrahim Patel, the country’s trade and industry minister, the people said, asking not to be identified as a public announcement has yet to be made. Talks will be held with South Africa’s politically powerful labour unions, business leaders and the Presidential Climate Change Coordinating Commission, three people familiar with the arrangements said.
The South African ministers pressed for details on what finance was available, but the envoys favour an incremental approach and more commitments from South Africa, the people said. While Gordhan urged support for Eskom, other options such as transitioning South Africa and its car industry toward electric vehicles were also discussed, they said.
Albi Modise, a spokesperson for the environment ministry, confirmed that a group of ministers met with the envoys but declined to comment further, saying a statement will be issued later.
Some senior members of South Africa’s government are pushing hard for climate mitigation measures. President Cyril Ramaphosa chairs the climate commission he created last year and its more ambitious emissions reduction target was adopted by cabinet this month. Creecy has said developed countries need to boost energy transition and climate-adaptation funding to developing nations.
“South Africa is well-positioned to obtain concessional finance both for the country-wide climate transition and the electricity transition in particular,” Gordhan said in a response to queries before the meeting.
Still, the pivot from coal faces opposition within South Africa. Gwede Mantashe, the country’s energy minister, has advocated for the construction of new coal-fired power stations. Mantashe, the former head of the National Union of Mineworkers, is the politically influential chairman of the ruling African National Congress.
The move to reduce South Africa’s reliance on coal comes as Chinese demand pushes prices toward record highs. The dirtiest fossil fuel, which was struggling against cleaner energy sources, is now seeing its biggest comeback ever, complicating international climate talks set to begin in just a few weeks.
Eskom has launched the Renewable Energy Tariff pilot programme to assist many businesses that have corporate renewable energy commitments. This enables customers to source a blended electricity supply with up to 100% of their electricity from one of the utility’s renewable sources.
The Renewable Energy Tariff pilot programme gives customers a mechanism to achieve their renewable energy commitments to purchase this energy from Eskom, without the initial capital investment of having to own a renewable energy generator or to enter into long term Power Purchase Agreements (PPAs). The offer allows customers to have a 24-hour blended renewable supply to their facility and allows them the flexibility to relocate premises without needing to move renewable energy assets.
Eskom generates green power from some of its renewable electricity plants such as the Sere Wind Farm and run-of-river hydro facilities. The Renewable Energy Tariff pilot programme is initially limited to renewable electricity generated from the Sere Wind Farm and only available to Eskom’s customers.
During the period of the pilot programme, Eskom offers a maximum of 300GWh per annum to customers supplied directly by Eskom, on a first-come-first-served basis.
COST-EFFECTIVE AND FLEXIBLE
Monde Bala, Group Executive Eskom Distribution Division explains, “The Renewable Energy Tariff is designed to provide a cost-effective and flexible option for Eskom customers to consume renewable power. It further provides flexible, convenient and short-term power purchases for when you move your facilities. It will be available to Eskom supplied customers whose electricity accounts are up to date.” Bala says the tariff will be available to Eskom business customers who have green targets and who would like to use renewable power in their facility or production processes.
All participating customers will have an option to select any percentage of their current electricity usage to be green. The Renewable Energy Tariff can also supplement wheeled electricity from a third party or own renewable electricity generated on-site to help customers achieve their clean energy target. The tariff is designed as a declining block tariff.
MORE GREEN LESS GREEN
The more green energy a customer purchases (as a percentage of total consumption), the lower the rate, more detail on the tariff pilot is available from the Eskom website (https://www.eskom.co.za/eas/renewable-energy/). Eskom customers, therefore, have an option to select an affordable contract, which is charged monthly, based on the percentage of renewable energy they consume, and this percentage will be charged monthly as specified in the contract.
At the end of 12 consecutive months, Eskom will evaluate the amount of renewable energy in kWh consumed against the contracted percentage, and if the actual capacity is less than the contracted capacity, Eskom will adjust the Renewable Energy Tariff based on the actual percentage. The renewable energy charge payable by the customer will be adjusted accordingly.
The customer’s next electricity account will be adjusted to reflect the difference. Eskom’s Renewable Energy Tariff pilot programme will last for a two-year period ending 31 March 2023, after which the company will make a decision whether to take the tariff for formal approval.
By Vanessa Mathebula – Quantitative Analyst at Prescient Investment Management
The much-anticipated COP26 is fast approaching. This is the 2021 United Nation’s Climate Change Conference, where each participating country, including South Africa, is expected to set more deliberate and ambitious climate change goals.
With the introduction of the Asset Manager’s Net Zero Agreement, fund managers globally are also now able to join the movement. Interested parties can pledge their commitment to playing an active role in supporting similar climate change goals to those of the respective countries by 2050 or earlier. Globally, there are already great initiatives in place, such as green financing solutions (e.g., green bonds), but, given our many macro-economic challenges, where do we stand as a country? Can we realistically move to the same rhythm as the global players?
Committing to advancing the goals of the Paris Agreement shows our willingness to collaborate and play an active role in achieving climate-related goals. However, we might have bitten more than we can chew, especially given the expectations of upping the ante in the upcoming COP26.
Fossil fuels are still a crucial driver of the SA economy
As a country, we rely on fossil fuels. For instance, coal continues to be the primary energy source as it caters for about 77% of South Africa’s energy needs, according to the Department of Mineral Resources and Energy. Furthermore, no material changes in this trend are expected in at least the next two decades. Unfortunately, the coal dilemma stretches wider than the obvious coal mining industry. As per the ripple effect theory, many other industries are, in fact, reliant on fossil fuels.
Aside from the obvious coal mining and electricity-generating companies, transportation (e.g. Transnet as it transports coal) and financial sectors can also be indirectly linked to the coal industry. This, therefore, means that the majority of South Africa’s productive economy can directly or indirectly be linked to fossil fuels.
Admittedly, there are initiatives in place that are meant to shift the country to ‘greener pastures’. However, the transition to these alternative forms of climate-friendly options is relatively slow. For instance, PWC’s Net Zero Economy Index shows South Africa is making minimal progress in decoupling emissions from GDP.
The country’s fundamental developmental challenges remain the main culprit. Not only do we lack the necessary infrastructure to enable such a transition, but the cost implications, especially for an overly indebted country like South Africa, coupled with the politics associated with such decisions, are other hurdles that cannot be ignored. We are, therefore, forced to acknowledge our shortcomings as a country and find ways to engage and promote realistic change.
In line with the Net-Zero goals, if asset managers were to restrict exposure to fossil fuel-linked companies and instruments materially, diversification and bottom-line investment performance would be materially affected. For instance, buying South African government bonds would be a questionable exercise as some of the proceeds are channeled towards assisting state-owned entities closely linked to the coal industry – e.g. Eskom. Bank paper would be questionable, too, as the average investor has no insight into the portion of the bank’s lending activities that are linked to the fossil-fuel industry.
This highlights the challenges we face as a country that still relies heavily on fossil fuels. Therefore, we are left with the question of whether we can materially limit exposure to the affected sectors without introducing any major adverse implications to the bottom line? Probably not! At least not any time soon, given the country’s sluggish progress towards introducing greener alternatives. However, this does not imply that we cannot take smaller strides each day towards having an overall positive impact from a sustainability standpoint.
A net positive contributor approach is a good start
One of the ways we can realistically advance towards achieving our sustainability goals, given the challenges we face, is to adopt a net positive contributor approach to overall Environmental, Social and Governance (ESG) factors. Not only does this enable us to factor climate-related factors into decisions in a less restrictive manner, but it also enables us to consider other sustainability factors, such as the social aspect, which is crucial for a country with a history of inequality like South Africa.
For instance, if we consider Eskom through a purely Net-Zero lens, no investor would touch it. However, once we accept that it is currently the primary producer of electricity, and thus supports economic activity countrywide and employs a notable portion of the country’s workforce, the scale would probably tilt to the positive for such a counter, keeping everything else constant.
At Prescient, we continuously seek to invest in net-positive counters. We assess the overall contribution of a given counter from an ESG risk and opportunity perspective based on our in-house developed ESG risk scoring tool, the Prescient ESG Scorecard. The scorecard is quantitative and free from human biases. The derived scores are based on over 60 metrics and are free from sector and size biases as we also factor sector materiality and adjust certain metrics by the market cap of the given counter. The scorecard output is integrated across investment teams enabling us to play an active role in moving towards sustainability as we tilt our investments towards net positive contributors. Of course, this is nowhere close to where we want to be from an overall sustainability perspective. We, therefore, continue assessing how viable it is for the local market to transition to a comprehensive Net-Zero approach. Until we reach a point where this is possible, we will continue the search for greener alternatives that don’t undermine the economy at the expense of South African society.
BY LLEWELLYN VAN WYK, B. ARCH; MSC. (APPLIED), URBAN ANALYST
Humpty Dumpty is a character in an English nursery rhyme, probably originally a riddle and one of the best known in the English-speaking world. He is typically portrayed as an anthropomorphic egg, though he is not explicitly described as such. Its origins are obscure, and several theories have been advanced to suggest original meanings. I thought it particularly appropriate to describe the following article – what are the impacts on the global economy and how does it recover.
Impact and Response
Many commentators and economists are focusing on how governments go about rebuilding their national and city economies once the world has passed through what Christopher Joye calls the Global Virus Crisis (GVC).[ii] According to The Economist, policy response has generally been swift and decisive.[iii] Globally central banks have cut interest rates since January 2020 and have launched new and substantial quantitative-easing schemes (creating money to buy bonds) while politicians are opening the fiscal taps to support the economy.
In the US, America’s Congress passed a bill that boosts spending by twice as much as President Barack Obama’s package in 2009. Britain, France, and other countries have made credit guarantees worth as much as 15% of GDP, seeking to prevent a cascade of defaults. On the most conservative measure, the global stimulus from government spending this year will exceed 2% of global GDP, a much bigger push than was seen in 2007-09. Even Germany, whose fiscal rectitude is a cultural cliché, is spending more.[iv]
The analysts at The Economist caution though that to focus just on the quantitative changes misses something crucial, which is that there are important qualitative changes underway in how policymakers manage the economy—the responsibilities they have assumed for themselves, what is seen as a legitimate action, and what is not, and the criteria used to judge policy success or failure. On these measures, the analysts note, the world is in the early stages of a ‘revolution in economic policymaking’.
Central banks have in effect pledged to print as much money as necessary to keep down government-borrowing costs. The European Central Bank is promising to buy everything that governments might issue thereby reducing the gap in borrowing costs between weaker and stronger euro-zone members, which widened in the early days of the pandemic.
The analysts note that politicians, too, are ripping up the rulebook. In past recessions, enterprises could go bankrupt and people, too, become unemployed. Even in normal economic times, roughly 8% of businesses in OECD countries go under each year, while 10% or so of the workforce lose a job. Now governments hope to stop this from happening entirely. President Emmanuel Macron reflects the view of many when he vows that no firm will “face the risk of bankruptcy” because of the pandemic.
Boris Johnson, Britain’s prime minister, contrasts his government’s response with the one during the last financial crisis: “Everybody said we bailed out the banks and we didn’t look after the people who really suffered”. Larry Kudlow, the director of America’s National Economic Council, calls America’s fiscal stimulus “the single largest Main Street assistance programme in the history of the United States,” comparing it favourably with Wall Street bailouts a decade ago.
To that end the analysts note that governments across the rich world are channelling vast sums to firms, providing them with grants and cheap loans to preserve jobs and keep their doors open. In some cases, the government is paying the wages of people who cannot work safely: the EU has embraced this policy, while the British state will pay up to 80% of the wages of furloughed workers. The American package includes loans to small businesses that will be forgiven if workers are not laid off. Households across the rich world are being given temporary relief on mortgages, other debts, rent and utility bills. In America, people will also be sent cheques worth up to $1 200.
Most economists support these measures. Nominally they are temporary, designed to hold the economy in an induced coma until the pandemic passes, at which point the world is supposed to revert to the status quo ante. But history suggests that a return to pre-Covid-19 days is unlikely.
Two lessons stand out:
1. Governmental control over the economy takes a large step-up during periods of crisis.
2. The forces encouraging governments to retain and expand economic control are stronger than the forces encouraging them to relinquish it, meaning that a “temporary” expansion of state power tends to become permanent.5
Road to Recovery
The extent of the economic damage and the time it will take for the economy to recover is subject to a high degree of speculation, and new models have been created to project a recovery trajectory. For example, the recovery can be V-shaped (after the downward fall the recovery will follow a straight line back to the original growth trajectory); U-shaped recovery (like V-shaped but with a longer turnaround period); VU shaped recovery (an initial pop, or sugar hit (the V), which is then superseded by a second, much slower growth phase (the U) due to a huge increase in debt repayment burdens and big creative destruction-induced output gaps (or excess productive capacity) as the virus forces the global economy to effectively rewire itself); Z-shaped (recovery follows the V-shaped trajectory but overshoots the original trajectory due to pent-up demand before falling back to the original trajectory); W-shaped (recovery begins buts fall back before climbing back up again); and L-shaped (growth recovers but ends up lower than that of the pre-C-19 economic growth).
In a survey of 106 economists and real estate experts conducted by Pulsenomics and Zillow, 41% of panellists expect the US recovery to follow a “U” shape, with the recession lasting several quarters before returning to growth.[vi] This prediction is in line with how the experts expect the US economy to recover overall. Forty-one percent said they think the economic recovery will follow a “U” shape, and 33% say it will be a bumpy, multi-year return to trend growth. Both patterns are characterised first by a sharp decline and then match how experts see transaction volume recovering, with the consensus generally being a more gradual journey back to normal.
Whatever the final shape may turn out to be, Eswar Prasad and Ethan Wu, writing for the Brookings Institution, warns, “The world economy is on the precipice of its worst crisis since World War II. As the newly updated Brookings-FT TIGER (Tracking Indexes for the Global Economic Recovery) makes clear, economic activity, financial markets, and private-sector confidence are all cratering. And if international cooperation remains at its current level, a far more severe collapse is yet to come.”[vii]
A wide variety of economic and survey data suggest that the economy will recover slowly even after the government begins to ease limits on public gatherings and allow certain shuttered restaurants and shops to reopen. Many economists and business owners say there will be no rapid economic rebound until people feel confident that their risks of contracting the coronavirus have fallen, either through widespread testing or a vaccine.[viii]
Prasad and Wu argue that while the current extraordinarily sharp downturn could prove to be relatively brief, with economic activity snapping back to previous levels once the Covid-19 contagion curve is flattened, there is good reason to worry that the world economy is heading into a deep, protracted recession. In their view, much will depend on the pandemic’s trajectory and whether policymakers’ responses are sufficient to contain the damage while rebuilding consumer and business confidence. They do not believe that a rapid recovery is likely due to ravaged demand, extensive disruptions to manufacturing supply chains, and a financial crisis already underway.
They, like many other commentators, draw a distinction between the 2008-09 crash, and Covid-19. Unlike the 2008-09 crash, which was triggered by liquidity shortages in financial markets, they point out that the Covid-19 crisis involves fundamental solvency issues for firms and industries well beyond the financial sector. In addition, they note, the current shock is simultaneous and universal. During and immediately following the 2008 crisis, some emerging markets, not least China, and India, continued to register strong growth, pulling the rest of the world economy along. But this time, no economy is immune, and no country will be able to lead an export-driven recovery.
Today’s collapse has increased deflationary and financial risks in the advanced economies and struck a significant blow to commodity exporters.
On top of it all, oil prices are plunging even more than they otherwise would, due in large part to Saudi Arabia and Russia flooding the market. In their view all told, the economic and financial carnage wrought by the coronavirus could leave deep, lasting scars on the global economy. While they recognise that central banks are stepping up to the challenge, they point out that central banks cannot offset the fall in consumer demand or stimulate investment by themselves. With both conventional and unconventional monetary-policy tools already stretched to the limit, fiscal policymakers will have to do more.
They suggest that well-targeted fiscal measures can soften the blow to consumers and businesses—especially small and medium-sized enterprises, which typically have minimal financial buffers—thereby helping to sustain employment and demand. In these desperate times, such measures should be fully embraced by all governments that currently benefit from low borrowing costs, even if they already have high levels of public debt.
They also emphasise that low- and middle-income countries that have inadequate health systems will need substantial support from the international community, potentially including concessionary debt relief.
But there is an elephant in the room: unfortunately, the world’s inability so far to forge a common front attests to the erosion of international cooperation, which is further damaging business and consumer confidence. They too, like many other commentators, call for this to change.
The world urgently needs honest and transparent information-sharing by national leaders, coupled with aggressive steps to contain the pandemic, extensive stimulus to mitigate the economic fallout, and a carefully calibrated strategy to restart economic activity as soon as it is safe to do so.
Christopher Joye agrees with the sentiments expressed by Prasad and Wu. Joye sees the global economy being burdened by a great deal more public and private debt because of the enormous fiscal policy responses that will need to be serviced through tax revenue and corporate/household earnings. This he argues will drag on future global growth after the initial pop in activity as businesses restart and the working-age population gets back into their day jobs.
On the matter of whether this precipitates a sovereign debt crisis, he believes that ultimately the central banks can cauterise this problem by continuing to do what they are currently doing: i.e., funding their domestic treasuries by buying government bonds via quantitative easing (QE).
After all, he notes central banks were originally created to fund governments during times of war (that term again), and that is arguably where the world finds itself now in terms of response.
On the question of inflationary shock, he expects the deflationary impulse of the GVC via the huge sudden increase in labour supply to overwhelm the inflationary impulse of the crisis over the short-to-medium term (in the next year or two) noting that the near-term inflation pressures obviously come through supply-chain rigidities as labour is taken temporarily offline.
He foresees a key consequence of the GVC as compelling much greater internalisation of supply-chains, especially those that service critical infrastructure and security-sensitive goods and services. In terms of changes, it is suggested that the GVC will result in permanent economic damage akin to a form of creative destruction where the virus kills off weak companies as well as unproductive employees. This he suggests is because many businesses will come back looking different, shedding low-quality workers, and closing unprofitable activities/subsidiaries.
Some industries will be permanently changed in both positive and negative ways, for example, entire communities are being forced to get much more comfortable with online shopping and the associated delivery process, reducing at the margin the demand for traditional retailing.
The cinema industry will be irreversibly damaged as consumption shifts away from theatres to on-demand digital platforms like Apple and Netflix, which will, in turn, allow these distributors to capture more of the value-chain in the same way Amazon did with bricks and mortar retailing. The commercial property sector is also likely to feel this change as there is a possibility of a permanent decrease in the demand for both office and retail space. Many companies may conclude they can save overhead by remaining disaggregated (not renting office space). This will result in a decline in the value of commercial properties, and the risk associated with commercial property debt could increase sharply.
Commercial property lenders’ LVRs might suddenly jump because of this. Indeed, he argues that a lot of distress in commercial property debt portfolios can be expected over the next 12 months.
The embedding of Zoom, or cheap video conference technology may dissipate the value of face-to-face meetings and result in a permanent decrease in the demand for expensive business-related travel and accommodation, adversely impacting airlines and hotels, as companies seek to enhance their operating efficiencies.
All this creative destruction could result in unemployment rates not returning any time soon to their pre-GVC levels which will, in turn, place downward pressure on wages. Ultimately, he concludes that this will result in a battle between the shock of the new – a virus that derails life as we knew it – and the opportunities presented by the gigantic stimulus afforded by fiscal and monetary policy.[ix]
Some commentators are not as pessimistic: Paul Krugman, one of the world’s most influential economists and 2008 Nobel prize winner, is pretty upbeat about the economy. In a Q&A session with Noah Smith from Bloomberg, he suggests that even though this crisis is different from anything seen before, there is a rather good handle on the economics. In particular, he argues, enough is known to understand why conventional responses like stimulus or tax cuts are inappropriate, and why we should be focusing on safety-net issues.
On the issue of duration, Krugman argues that data would suggest a fast recovery once the virus is contained. But he provides some big caveats. One is that the duration of the pandemic is not known: if countries open too soon, it will extend the period of economic weakness. The second is that even if there were not big imbalances before, the slump may be creating them now. Business closures will require time to reverse. He also wonders how much long-term change will be experienced because of the virus. If there is a permanent shift to more telecommuting and less in-person retail, then there will be a shift of workers to new sectors, which will take time. All that said, he does not see the case for a multi-year depression.[x]
Analysts at The Economist believe that some economies will suffer much more than others because economic crises expose and exacerbate underlying structural weaknesses.
They argue that three factors should help separate the bad economic outcomes from the dire ones:
1. a country’s industrial structure; the composition of its corporate sector; and the effectiveness of its fiscal stimulus. Regarding the first, those countries that depend on labour-intensive activities will be harder hit. This includes countries reliant on their construction and tourism sectors. Conversely, those industrial structures that enable more people to work from home should not be hit as hard.
2. Economies with a large share of small firms are likely to be hit harder because smaller enterprises tend to have few if any cash buffers, making it difficult for them to survive a drop in revenues.
3. The ability of the country to roll out large stimulus packages. Some countries have provided significant packages while others, especially those with high debt levels, are more constrained. The design of the stimulus also plays a part: some countries are providing support directly to households while others are subsidising wages.
Post-C19 Economic Structural Reforms
Analysts do not generally support government pledges to protect jobs as it prevents workers from moving from failing sectors to new emerging ones, thereby slowing the recovery. If the lockdown ends early some economies will be able to resume production quickly.[xi]
A huge question remains however: what will be the lasting effects of Covid-19? Every day, in ways small and large, the spread of the coronavirus is reshaping politics.
John Cassidy, in a piece in Bloomberg.
As the death toll rises and the economic fallout spreads, he argues that measures once considered unthinkable are being adopted, and not just in the public-health sphere.
Analysts from The Economist believe that the size of the state will alter. In the short term, they foresee government debt rising sharply as spending jumps and tax revenues collapse. Thereafter, government attention will turn to repaying the debt.
They also see central banks’ innovations having lasting consequences. They, as do many other economists, do not see inflation rising any time soon, but do have a concern about deflation especially as central banks are pressured into lowering interest rates to zero to support government borrowing.
Then they see the possibility that this novel idea that the government needs to preserve firms, jobs, and workers’ incomes at practically any cost may become embedded in government, especially if the intervention proves successful in narrow terms. Although the policy may formally end once the pandemic has passed, political pressure for similar support schemes—from the nationalisation of tottering firms to the provision of a universal basic income—may well be higher the next time a sharp downturn comes along. If politicians can preserve jobs and incomes during this crisis, many people will see little reason why they should not try again in the next one.
In the same vein, they see calls for a more activist fiscal-monetary government coming against a backdrop of structurally higher demand for state spending. The public sector tends to provide labour-intensive services in which productivity improvements are difficult, such as healthcare and education, yet it must match the salaries of workers in other sectors to retain its own, even as they become less productive relative to the overall economy—a phenomenon which raises the cost of provision. Governments focus on social support during C-19 might raise expectations that it is the new normal, especially in the health sector. In the US, net support for Medicare for All—those who support it minus those who oppose it—has risen by nine points.[xii]
In another significant development, the mass layoffs that have resulted from the pandemic have also laid bare the iniquities of the gig economy, in which Uber drivers and other online-platform workers, temp-agency workers, and a whole variety of freelancers do not have access to health insurance, sick leave, or unemployment insurance. During an appearance on CNBC, the investor James Chanos said he was selling short the stocks of gig-economy companies because their business model, which is based on classifying workers as self-employed to avoid giving them costly benefits, is likely to be challenged by both political parties.
The Economist’s analysts believe that the likely economic effects of the pandemic reach far beyond the role of the state. Countries could become even less welcoming to immigrants based on an argument that it will reduce any likelihood of infection from foreign arrivals.
Using the same logic, resistance to the development of dense urban centres could mount, thereby limiting the construction of new housing and rising costs. More countries may seek to become self-sufficient in the production of strategic commodities such as medicines, medical equipment, and even toilet paper, contributing to a further rollback of globalisation. However, they argue that the redefined role of the state could prove to be the most significant shift noting that the rules of the game have been moving in one direction for centuries.
Scholars from the Brookings Metropolitan Policy Program on the other hand believe that a major transformation is unlikely and point out instead that the Covid-19 crisis seems poised to accelerate or intensify many economic and metropolitan trends that were already underway, with huge implications of their own.[xiv]
One of those trends they foresee is automation. Mark Muro, one of the scholars, notes that while automation in the workplace has been spreading over the last decade, it will likely surge in the coming years because as firms’ revenues decline, workers become relatively more expensive. In this case, Covid-19 won’t so much change the automation trend as amplify it, increasing the vulnerability of young people, people of colour, and those with less education and further dislocating jobs in food service or cashiers as they become automated.
Another trend they ponder is whether the trauma of social distancing and the rise of telework will finally empty out the ‘superstar’ cities and lead to a decentralisation of the nation’s hyper centralised urban map. They believe this might happen.
Then there is the continuance of Big Tech itself: while it seems natural to assume that virtually every industry will be humbled by Covid-19, they think it is likely that the big tech titans—Amazon, Facebook, Google, Microsoft, Apple, Netflix, etc.—will emerge from the crisis stronger than ever.
These titans previously captured dominant market shares in the decade following the last recession and are likely to further capitalise as stay-at-home workers rely on their remote work tools, video calling, e-commerce, and video streaming. They point out that these giants are sitting on huge piles of cash and will be ready to snap up any choice tech or other properties that stumble.
Tracy Hadden Liu, another team member, argues that retailers, their landlords, and suppliers were already responding to multiple industry-wide trends before the coronavirus struck, including tariffs, a shift in consumer demand from products to experiences, e-commerce, and the sharing economy. The resulting strains that were already motivating these players to innovate or exit are simply accelerating the need to be creative and embrace new models to deal with the disruption arising from the pandemic.
In the property market, it is suggested that a 10-year commercial lease in a single-use building will no longer be standard: seasonal retailers were already experimenting outside of the big box, including markets and pop-ups in flexible spaces.
So were office tenants through WeWork and other co-working spaces. In addition to new formats and lease terms, profit-sharing leases will become an increasingly important tool to help new businesses get started, survive slowdowns, and provide a return to landlords who invest in their tenants’ success.
In the food sector, convergence and hybridisation will accelerate in food retail, which will return to be a revitalising force in urban life. Liu points out that IKEA was already a furniture showroom, warehouse, and restaurant. High-end grocers were encouraging shoppers to have a beer prior to the outbreak of the pandemic.
Restaurants were increasingly not just dine-in, but fast-casual or mobile food trucks. Whether through app-based delivery or prepared food from wholesalers’ people will return to eating much of their food prepared outside the home. In 2017, jobs in leisure and hospitality (which includes all bars and restaurants) grew to outnumber jobs in retail trade.
Liu believes that for commercial real estate and local governments, food retail will continue to grow in importance. Restaurants, in whatever format, will continue to be a growing share of tenants and sales tax generators as other storefronts are impacted by tariffs and e-commerce oligopolies. And the more people eat out, the more proximity to food retail will shape office and residential tenant demand, as well as home sales. Her summation: the pandemic is a setback, but not a reset.
Another pre-Covid trend raised is the housing crisis. Martha Ross and Jenny Schuetz, two members of the team, note that in the best of times—for example, when unemployment is below 4%— tens of millions of workers still earn barely enough to live on, meaning that basic costs like housing were already a stretch for these and other workers. More than 75% of low-wage workers are ‘housing-cost burdened,’ i.e., they spend more than 30% of their income on rent. The typical low-income renter household spends more than half of its income on rent.
In the Covid-19 era—with mass layoffs in hospitality, retail, and entertainment—earnings have simply disappeared for millions of workers and many households that previously strained to pay rent will now find it impossible.
People commonly reduce housing costs by “doubling-up” with family or moving into lower-quality housing. Given the thin financial reserves held by renter households, many people will be forced into one of these options. Notwithstanding a halt on evictions in some countries, stronger and more direct financial assistance will be required for households. While the housing affordability crisis predates the current health crisis, it will worsen in the short run if governments are slow to respond.
Inequality increases among older Americans is another trend identified by Annelies Goger and Nicole Bateman. They note that 40% of workers over age 62 earn low wages. Covid-19 is likely to have eroded savings across the board which means that many older workers may have to stay in their job out of necessity. It is possible that labour outcomes could worsen for older workers who lose their jobs in the sense that it will take much longer for them to find another job, and generally that will come with a pay cut too.
Covid-19 will accelerate yet another trend namely the declines in microbusiness employment. Microbusinesses with under four employees are only half as likely to add jobs as larger businesses already. Recent statistics demonstrate how microbusinesses have been on the losing end of long-run structural shifts in the US. The team estimates that about 2.9-million microbusinesses are in industries at immediate or near-term risk from Covid-19. How many of those microbusinesses survive will depend, they think, on the duration of social distancing measures and the success of countervailing policies. They do stress that without a robust policy response to not only mitigate small business damage in the immediate term but also support entrepreneurship more robustly in the recovery, the pandemic will accelerate the structural decline in microbusiness employment.
Humpty Dumpty Economies
At a more fundamental level, Kallis G., Paulson, S., D’Alisa, G., and Demaria, F. argue that the pandemic has laid bare the fragility of existing economic systems, and what will be required to become more resilient to crises – pandemic, climatic, financial, or political – is to build systems capable of scaling back production in ways that do not cause loss of livelihood or life: “We need degrowth” they suggest. Their argument is based on the observation that current economic systems are organised around the constant circulation, where any decline in market activity threatens systemic collapse, provoking generalised unemployment and impoverishment.
While they point to commentaries made by publications such as Forbes, the Financial Times and the Spectator who have been quick to claim that the pandemic has revealed the ‘misery of degrowth’, they argue that what is happening is not degrowth, but purposefully slowing things down in order to minimise harm to humans and earth systems and to reduce exploitation. In their view, degrowth is a project of living meaningfully, enjoying simple pleasures, communing, sharing, and relating more with others, and working less, in more equal societies.[xv]
New Green Deal
There is widespread support for the recovery spend to be used to simultaneously address the other elephant in the room – climate change. Many argue that the pandemic must not be a reason to weaken the commitments to net-zero emissions. In fact, the argument is made that climate action is vital protection against further global shocks, especially as governments plan their post-pandemic stimulus packages.
It will be tempting for some governments to overlook the climate change challenge in the rush to restart the economy. Anna Skarbek cautions that some governments are already eyeing the fossil fuel sector as a beneficiary of any post-Covid-19 stimulus. Not all governments have responded to a rising chorus of voices demanding a green economic recovery.
The International Monetary Fund has been tracking national stimulus and economic recovery plans. So far, only a handful of them directly targets climate change, the IMF reports. On the contrary, some spending is headed in the opposite direction through government fuel subsidies and other fossil fuel-friendly measures. The IMF’s Covid-19 recovery tracker notes a lot of global spending on electricity cost relief. Other measures the IMF has noted include fuel price discounts for aviation. Some governments are buying fuel for their fishing fleets, while others are extending economywide fuel subsidies instead of eliminating them as the United Nations’ top leadership has called for.[xvi] The energy minister in Australia is flagging gas-fired power to stimulate the economy.[xvii]
There is particular concern over how China will design an overall economic recovery plan. Following the global financial crisis of a decade ago, Beijing launched a massive round of infrastructure spending that saw its greenhouse gas emissions soar to new heights. China is now by far the world’s largest producer of heat-trapping emissions. In a recent study published in the journal Nature Sustainability, scholars in Malaysia and Australia expressed concern over China’s vaunted Belt and Road Initiative, noting that Beijing has already directed nearly $575-billion overseas in efforts often aligned against sustainability objectives. They see more to come and are urging receiving nations and financing arms to put restrictions on the funding to ensure greater protections for biodiversity and other “indicators of environmental governance,” according to the research team, led by University of Queensland professor Divya Narain.[xviii]
For many countries, the lockdown response to Covid-19 has presented a horrific binary choice: economy at the expense of climate change, or climate change at the expense of the economy.
The socio-economic devastation the virus has inflicted is a reminder of our systemic vulnerability, and the importance of prevention and mitigation. As Anna Skarbek stresses, Covid-19 provides fresh evidence of the scale of economic shock the world faces if it fails to meet the targets of the Paris Agreement.
In a major study published in Nature Communications last month the dollar value put on the cost of climate inaction was between US$150-trillion and US$792-rillion by 2100 making the global shock even more financially catastrophic than coronavirus.[xix]
Fortunately, there is a third way out of this binary choice: Don Hall posts that one of the most hopeful things he has stumbled across since this crisis began is A Green Stimulus to Rebuild Our Economy: An Open Letter and Call to Action for Members of Congress which was published by a team of 11 prominent academics, scientists, policy experts, and non-profit advocates. More than 1 800 individuals and organisations signed on within the first nine days of its release.
The overall approach of the Green Stimulus Letter is based on five main principles namely:
1) health as the top priority for everyone
2) providing economic relief to directly to people
3) rescue workers and communities, not corporate executives
4) make a down payment on a regenerative economy while preventing future crisis
5) protect the democratic process while protecting each other
These five principles are supported by four key strategies:
1) create millions of new family sustaining, career-track green jobs
2) deliver strategic investments like green housing retrofits, rooftop solar installation, electric bus deployment, rural broadband development, and other forms of economic diversification to lift up and collaborate with frontline communities
The research published in Nature Communications also points out that limiting global warming to 1.5°C would deliver a corresponding boost, with the global economy growing by US$616 trillion compared to inaction. Skarbek notes that research undertaken at Oxford University by Nobel-prize winner Joseph Stiglitz and climate economist Nicholas Stern concluded that climate mitigation actions deliver maximum economic growth multiplier benefits from a stimulus perspective.
The study catalogues more than 700 stimulus policies and makes comparisons with the global financial crisis of 2008. In the study they compared green stimulus projects with traditional stimuli, such as measures taken after the 2008 global financial crisis, and found green projects created more jobs, delivered higher short-term returns per pound spent by the government, and lead to increased long-term cost savings. Clean energy infrastructure construction is one example, generating twice as many jobs per pound of government expenditure as fossil fuel projects around the world. Others include expanding broadband so more people can work from home.[xxi] Stern also warned that stimulating new jobs in heavily emitting sectors was short-sighted. “The jobs of the past are insecure jobs,” he said. “[To create future jobs] we need the right kind of finance in the right place at the right scale at the right price.”
Net-Zero Zero-Net future
The strategic targeting of stimulus funds is therefore critical: the greatest risk to a systemic change in consumption and production patterns is for governments to occur increasing debt through spending trillions of dollars on propping up business, as usual, leaving no economic capacity to invest in building resilient local communities and moving toward a low-carbon future.
Researchers from the University of Oxford, the London School of Economics and Political Science, Columbia University, and the University of Cambridge, undertook a survey of 231 central bank officials, finance ministry officials, and other economic experts from G20 countries on the relative performance of 25 major fiscal recovery archetypes across four dimensions: speed of implementation, economic multiplier, climate impact potential, and overall desirability. Their study identified five policies with high potential on both economic multiplier and climate metrics: clean physical infrastructure, building efficiency retrofits, investment in education and training, natural capital investment, and clean R&D.
To monitor the stimulus spend, a team of researchers from Johns Hopkins University has set out to measure what percentage of the billions of dollars that world governments are spending on the recovery might result in lasting reductions of greenhouse gas emissions. They note that studies of the impacts of past economic downturns, such as the recession of 2007 to 2009, provide scant information on what percentage of the recovery money spent delivered long-term benefits to the climate. Estimates of the 2009 recession show that somewhere between 5% and 16% had impacts on climate change-related issues.
They caution that information from the aftermath of earlier recessions shows that typically rebounds have more than offset greenhouse gas reductions from the recessions themselves and quickly surpass what might have been saved if it is not done well.[xxii]
There is precedent from targeted directing of public funds that have worked in the past: President Obama was able to introduce a stimulus package stacked with incentives for green investment and tougher environmental regulation after the economic crash of 2008.
A post-pandemic economic reconstruction based on restructuring the energy map makes sense.
But for the Covid-19 event, signs thus far are mixed. The $2.2-trillion stimulus package agreed by the US Congress may have avoided sinking taxpayers’ dollars into a rescue plan for the country’s struggling coal industry, but it also failed to make any environmental requirements on those industries, such as the aviation industry, that were bailed out. Congress members have argued that in this case the holding up a desperately needed economic-rescue package in the name of climate action was an untenable proposition. However, care must be taken to avoid using that argument again.
The renewable energy sector is one of the sectors favoured by many commentators as a prime vehicle for stimulating the economic recovery while also mitigating climate change.
One of the concerns about RE in the past was its ability to carry the electricity mix, but as Tom Andrews, a senior analyst at Cornwall Insight notes, while the generation balance is likely to return to normal as countries come off lockdown, this has demonstrated that managing a grid with high renewable penetration is feasible. This may therefore become the new normal as more renewable generation is deployed across Europe.
Renewable energy is also supported by the International Energy Agency (IEA) who, in their Global Energy Review report, supported the view that renewables are the only power generation source that is experiencing rising demand and penetration amid the slump in energy demand brought on by Covid-19 industrial shutdowns. Due to priority dispatch for renewables and lower operating costs, the IEA expects solar, wind, and hydropower to experience uplift during the public health crisis and subsequent economic recovery.[xxiii]
In a policy brief for policymakers, the IEA presents four strategic considerations:
Energy efficiency actions can support the goals of economic stimulus programmes by supporting existing workforces and creating new jobs, boosting economic activity in key labour-intensive sectors, and delivering longer-term benefits such as increased competitiveness, reduced greenhouse gas emissions, improved energy affordability and lower bills.
2. Governments can deliver stimulus at scale and speed by leveraging existing programmes and standardising designs, eligibility criteria and contracts; choosing shovel-ready options for retrofits and technology upgrades, and considering how energy efficiency can be built into all government stimulus programmes.
3. Important market considerations include aiming for high energy efficiency without constraining programme delivery; setting sufficiently attractive incentives to deliver high uptake without significantly increasing program costs and risks; considering the capacity of suppliers to scale up rapidly while maintaining quality and safety of products and services; and considering the consumer motivations and demand for products and services.
4. Government can facilitate better outcomes from large-scale investment programmes by addressing unnecessary regulatory barriers; turning short-term impacts into long-term transformations by raising energy efficiency standards; and considering the resource efficiency impacts and recycling sector opportunities as part of programme design.[xxiv] It is argued that apart from the climate change benefits, solar and energy storage in particular offer swift, job-intensive opportunities for growth, with average ground-mount sites able to be built in a few months and rooftop installations often taking only a day or two.
The EU’s C-19 recovery plan aims to do just that: their €750 billion ($825 billion) recovery package for the coronavirus pandemic includes plans to address the other global crisis, climate change. European Commission President Ursula von der Leyen views the proposal as a vehicle to steer the continent toward carbon neutrality by 2050, a critical deadline if the world is to avoid the worst effects of global warming. The EU plan calls for investments in clean technologies and value chains and for increasing investments in renewable energy, energy storage, hydrogen, and carbon capture as well as storage technologies. Funds under the plan would be directed toward installing 1-million EV chargers. It also proposes a renovation wave of basic infrastructure investments to create millions of jobs in construction, renovation, and other labour-intensive industries.
Most of the EU’s plan would be paid for via debt raised in capital markets, loans with very long-term maturities, by new taxes, including taxes on carbon emissions, a new carbon border adjustment mechanism, and taxes on big companies that benefit most from the single market. [xxv]
France also announced an €8 billion bailout of its automotive industry. However, the French plan is to boost domestic production of electric vehicles and see France emerge, as President Emmanuel Macron put it, “As the leading producer of clean vehicles in Europe.” The subsidy plans include exceptional support measures to help consumers purchase battery hybrid and all-electric vehicles.[xxvi]
South Korea ― the world’s seventh-largest source of planet-heating carbon dioxide ― too has set course to become the first East Asian country to reach net-zero emissions by 2050. The ruling party named its official climate manifesto the Green New Deal, becoming the biggest emitter yet to endorse moving toward the kind of industrial planning and social safety net expansion rarely seen outside of wartime. South Korea’s proposal includes ending public institutions’ financing of domestic and overseas coal projects, establishing a new program to retrain workers for green jobs, and making large-scale investments in wind and solar energy. The plan also pledges to research and consider a carbon tax.[xxvii]
As Enrique Dans put it, a post-pandemic economic reconstruction based on restructuring the energy map makes sense. We know we must do it, and we know the reason we haven’t done it so far is because it challenges the interests of a powerful few. The time has come to abandon outdated concepts, to change our mindset, and to put the use of renewables at the top of our list of priorities.[xxviii]
Some concern has however been expressed that a lack of a gender lens when designing the stimulus packages generally has favoured sectors dominated by men. In New Zealand, the Ministry for Women warned its minister that the stimulus package risked further exacerbating gender inequalities, particularly for wahine Maori, Pasifika, disabled and rural women. This is a likely unintended consequence of favouring infrastructure projects, a sector traditionally dominated by the male workforce. The ministry noted that women were just 14.4% of the construction workforce, and 24.5% of the electricity, gas, water, and waste services.[xxix]
Other industries such as retail, tourism and hospitality – also hard hit by the shutdown – employ high numbers of women. Johnston makes the argument that investing in social infrastructure such as health, caring, and education would create more jobs than the same investment in construction. It is argued that the absence of a gender lens is reflective of budgets being prepared without investigating ‘who” would benefit from the investment.
Cities are also responding to the opportunity. Amsterdam is pursuing a unique approach by adopting the so-called ‘doughnut approach’ developed by British economist Kate Raworth from Oxford University’s Environmental Change Institute. This model forgoes the global attachment to economic growth and laws of supply and demand in favour of a set of minimum needs required to lead a good life as encapsulated in the UN’s sustainable development goals which include food and clean water to a certain level of housing, sanitation, energy, education, healthcare, gender equality, income, and political voice.
Raworth puts it more succinctly’ “The central premise is simple: the goal of economic activity should be about meeting the core needs of all but within the means of the planet. The “doughnut” is a device to show what this means in practice.”[xxxi]She explains, “The world is experiencing a series of shocks and surprise impacts which are enabling us to shift away from the idea of growth to ‘thriving’.” This approach, she argues, recognises that our wellbeing lies in balance, and this is the moment we are going to connect bodily health to planetary health.
In the private sector, Covid-19 appears likely to reshape sustainable investing in part, because in the aftermath of the pandemic more focus will be placed on social factors, such as health and safety, and the treatment of staff. Some asset managers think that the pandemic will become an environmental, social, and governance (ESG) litmus test. They envision interrogating firms about their actions during the crisis to gauge the businesses’ sustainability credentials.
The pandemic may also help to focus the minds of private sector investors on other threats such as the impact of climate change. Few investors or companies took the risk of a pandemic seriously at the start of the year, and the threat of devastating floods or once-a-century storms often get a similar treatment, but C-19 may just change that.
Our wellbeing lies in balance, and this is the moment we are going to connect bodily health to planetary health.
And encouragingly a remarkable list of business leaders is adding their names to a call for stimulus funding to be invested in what they refer to as “the economy of the future.”[xxxii] Chief executives, chairs and senior executives from major organisations are urging for massive investments in renewable power systems, a boost for green infrastructure and buildings, targeted support for low-carbon activities, and other similar measures.
In Europe, this call is aimed at making the European Union the ‘world’s first climate-neutral continent’ by 2050. In Australia, a leading business group is calling for the two biggest economic challenges in memory – recovery from the Covid-19 pandemic and cutting greenhouse gas emissions – to be addressed together, saying it would boost growth and put the country on a firm long-term footing. This group is among a band of community leaders and industry groups urging governments to back climate solutions in the pandemic recovery rather than projects that entrench or increase emissions. The Investor Agenda, a global group of institutional investors and managers in a statement said governments should avoid prioritising “risky, short-term emissions-intensive projects”, and that accelerating the shift to net-zero emissions could create significant employment and economic growth while improving energy security and clean air. As they put it, “The path we choose in the coming months will have significant ramifications for our global economy and generations to come.”[xxxiii]
The Australian business group has identified a number of opportunities including improving energy management in homes and buildings by plugging drafts, modernising equipment and backing local electricity generation and storage; boosting electricity networks by rolling out smart meters and moving edge-of-grid customers onto mini-grids; helping shift heavy industry to run on clean electricity and hydrogen, and supporting large and small energy storage. On transport, the group said it was an excellent time to prepare cities and major corridors for mass take-up of electric vehicles by installing or preparing charging points at service stations, in public and government car parks, and at apartment blocks. They suggest governments would have different preferences on whether to use regulatory reform, tax incentives, grants, or other approaches but, using the example of electricity, urged government to settle on a sound long-term design for market rules and climate policy could do as much to boost investment as direct public financial support.
The public too is wanting to use this moment to recalibrate the structure of the economy. Polls taken in the United Kingdom finds that most Britons want quality of life indicators to take priority over the economy. As reported by Fiona Harvey, a YouGov poll has found eight out of 10 people would prefer the government to prioritise health and wellbeing over economic growth during the coronavirus crisis, and six in 10 would still want the government to pursue health and wellbeing ahead of growth after the pandemic has subsided, though nearly a third would prioritise the economy instead at that point.
The finding comes as millions of people face economic hardship because of coronavirus and the lockdown, while some measures of the quality of life – such as air pollution and the natural environment – are showing signs of improvement.[xxxiv]
Perhaps Kallis et al (2020) summed it up best in their study when they noted: “As we move from the rescue to the recovery phase of the Covid-19 response, policy-makers have an opportunity to invest in productive assets for the long-term. Such investments can make the most of shifts in human habits and behaviour already underway.”[xxxv]
Build, Build, Build: Investing in Infrastructure
Not surprisingly, most governments are including infrastructure development as part of their recovery plans: it makes economic sense to invest in asset formation rather than encourage consumer spending. However, there are debates about what type and scale of infrastructure to invest in. Some commentators are arguing for investment in housing, while others are looking for large-scale infrastructure investments.
As the US Congress and the White House contemplate the next phase of the government response to the coronavirus pandemic and its economic toll, legislators are increasingly raising the prospect of enacting a multitrillion-dollar infrastructure plan that, they claim, could create thousands of jobs. As the novel coronavirus ravages the economy, parties appear to be coalescing behind the idea of something akin to a New Deal-style jobs program to help the nation cope with what is expected to be a deep recession.
Speaker Nancy Pelosi of California outlined the contours of their proposal, building off a five-year, $760-billion framework. Among the new provisions are an extra $10-billion for community health centres fighting the spread of the pandemic and a programme that would provide federal grants to pay for drinking water and wastewater utility bills in low-income households during public health crises. Democrats’ infrastructure plan includes billions of dollars to expand the country’s passenger rail network, improve Amtrak stations and services, maintain ports and harbours, increase climate resiliency and further address greenhouse gas pollution. It would also dedicate funds to expand broadband access, a response in part to the extent that millions of Americans have depended on internet connectivity while staying at home to slow the spread of the virus.[xxxvi]
It has long been argued that construction has a significant multiplier effect in terms of upstream and downstream job creation. At the same time, providing affordable housing appears to be a serious challenge for most governments. Paul Emrath marries these two issues together when he makes the case for investment in homebuilding based on the economic impact that residential construction has on the economy. The most obvious impacts of new construction, he notes, are the jobs generated for construction workers.
But, at the national level, the impact is broad-based, as jobs are generated in the industries that produce timber, concrete, lighting fixtures, heating equipment, and other products that go into a home or remodelling project. Other jobs are generated in the process of transporting, storing, and selling these products. Still, others are generated for professionals such as architects, engineers, real estate agents, lawyers, and accountants who provide services to home builders, home buyers, and remodelers. He found that in the US construction sector building an average single-family home created 2.9 jobs; an average rental apartment 1.25 jobs; and for every $100 000 spent on remodelling 0.75 jobs. The above numbers are for full-time equivalents, i.e., enough work to keep one worker employed for a full year based on average hours worked per week in the relevant industry.[xxxvii]
The British Prime Minister, Boris Johnson, seems to favour a “dig yourself out of the hole” approach as well, according to The Economist. In a speech on June 30, he announced a plan to increase capital spending to 3% of GDP, the highest consistent level since the 1970s, and will speed up £5bn of repairs to roads, schools, and hospitals. But Colin Talbot of the Centre for Business Research at the University of Cambridge makes the point that calling for more infrastructure without answering the questions of why and for what makes no sense. For example, will ailing towns be best served by becoming attractive commuter hubs for neighbouring cities, or by trying to revive their industries? Henry Overman of the London School of Economics argues that what ultimately makes places prosperous is a high density of skilled workers, which means thinking hard about education, welfare, and public health.[xxxviii]
There are however concerns about the quantum of funds needed to adequately fund infrastructure backlogs, notwithstanding the impressive numbers being quoted in government budgets. The findings of National League of Cities (NLC) new Covid-19 Local Impacts Survey of 1 100 US municipalities found that critical infrastructure is a key at-risk area as 65% of surveyed cities look to delay or cancel their infrastructure projects, which could create an “economic ripple effect” if actions aren’t taken to support capital expenditures and projects. As the vice-president of NLC put it, “I hate to say it, but the latest Covid-19 financial impact data we’re sharing with you today is painting a dire picture for our infrastructure future.”[xxxix]”
As the world tries to deal with the ongoing challenges of Covid-19, it is worth reminding ourselves that infrastructure investment and climate action are both urgently need and that with the right approach, both goals can be achieved simultaneously. This article provides some indications of what the right approach may be.
[i] Opie, J. and Opie, P., ed. (1997) . The Oxford Dictionary of Nursery Rhymes (2nd ed.). Oxford: Oxford University Press. p. 254. ISBN978-0-19-860088-6.
[xxxv] Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and Zenghelis, D. 2020. “Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?” Smith School Working Paper 20-02.
Shedding the light on Eskom and its mountain of debt
Eskom released its FY20/21 financial results on 31 August 2021. These were characterised by the persistent strain on the liquidity and profitability position, high gross finance costs and some challenges to operational efficiency.
By Sithembiso Garane, Head of Listed Credit @ Futuregrowth
The group incurred a loss after tax of R18.9 billion, a slight uptick from the previous year’s loss of R20.7 billion. The audit opinion was qualified owing to irregular expenditure and going concern risk.
Eskom current debt maturities were reduced to R44.9 billion from R128 billion in FY20. The group’s cash generation capacity has continued to deteriorate since its five-year peak in FY17 at R47.4 billion and is currently sitting at R30 billion.
The prevailing theme remains Eskom’s unsustainable debt, despite the recent equity injection and reduction in capital expenditure. Operating expense increases offset the revenue surge. Primary energy cost pressure and the inability to contain employee costs continue to pose a significant challenge in the utility expenditure reduction programme.
The energy availability factor decreased from 66.64% to 64.19%, largely attributed to increased maintenance. During the year, two Kusile power stations were added to the grid, contributing 1 500MW, and Medupi’s final unit was handed over to Eskom in July 2021.
Investigations into the recent Kusile explosion are ongoing, with the damage estimated at R2 billion. Eskom expects to incur an additional R38.4 billion in environmental project costs on Medupi, as part of its loan conditions with the World Bank.
Financial highlights FY20/21
Revenue was up 2.38% year-on-year, solely owing to the 8.76% tariff increase. Sales volumes significantly declined by 6.7% (from 205 635 GWh to 191 852 GWh) off the back of the Covid-19-induced slump in demand across all customer categories. Management noted that sales volumes are expected to rebound in FY21/22, albeit not to pre-Covid levels. Revenue is expected to be aided by 15.06% tariff increase in the medium term.
Interest bearing debt (IBD) reduced from R483 billion to R401 billion, assisted by the R56 billion equity injection from the government. The reduction in the capital expenditure programme over the reported period also contributed to the net redemption of debt. Finance costs remained very high, despite the slight decrease from R48 billion to R45 billion. As a result, the effective cost of debt spiked from 9.58% to 9.66%. This remains a concern for the issuer, as it seeks to extricate itself from this debt overhang.
Primary energy costs continued to rise in spite of the lower demand: 3.4% year on year, due to a combination of coal and import cost escalation, higher utilisation of open cycle gas turbine (OCGT) and renewable energy independent power producers (IPPs). The IPPs contributed 24.0% in total primary energy costs and accounted for 6.0% of energy generation. The growth in contribution was stunted by the force majeure on wind energy procurement during the hard lockdown. Coal contribution, which currently accounts for 85% of energy generation (and 65% of the cost base), is expected to decrease as Eskom rolls out its decarbonisation strategy.
Eskom’s average employee cost decreased from R775 000 to R735 000 as a result of the slight reduction of headcount from 44 000 to 42 000 and a management salary freeze. This is expected to be dampened by the 7% wage increase settlement over the next three years. Employee costs remain the Achilles heel for the counterparty as it grapples with its cost base. A 42 000 headcount is still a far cry from the 35 000 optimal level as noted by management. The total employee cost accounts for 16.35% of Eskom’s revenue.
Municipal debt arrears increased by 26% year-on-year from R28.0 billion to R35.3 billion (including interest accrued over time). This figure was R6 billion in FY16 and is escalating very fast. Efforts to address collections from the top 20 defaulting municipalities continue to be questionable. Eskom has entered into a payment agreement with 12 of the 20 defaulting municipalities in an effort to increase recovery; however, 10 of the 12 are yet to comply with the agreement.
The utility remains completely reliant on its R350 billion government guarantee programme to raise debt in the market. Currently, the guarantee headroom is R47 billion, inclusive of the R32 billion committed drawdown. The expected debt service costs for FY22 are R71 billion (FY21 103 billion), R31 billion of which are finance costs. Eskom generated R30 billion from operations, hardly covering its net finance costs (R33 billion in FY21). The total funding requirement for FY22 is R39 billion which can be fully absorbed by the guarantee headroom.
Eskom recorded a net loss for the year of R18.9 billion and R37.2 billion in irregular expenditure, which is the main driver for its audit qualification. The reduction in debt does give some reprieve on debt service costs; however, the entity’s failure to generate sufficient cash from operations remains a significant risk.
Eskom expects to fully unbundle the transmission division by December 2021, followed by the generation and distribution divisions in December 2022. This is subject to all regulatory and legislative compliance.
The functional separation of the three entities is said to be complete, and plans are afoot to create legal entities that will be operated independently. Some efficiencies may be unlocked through this exercise, but this will not address the core problem of debt spiraling out of control.
The majority (60%) of Eskom’s employee costs come from distribution and shared services – a low-margin division and a cost centre. Other high operating expenses from the generation division are due to the provision for the decommissioning costs of coal generation and are not expected to remain at current levels in the medium term. The third-party generated energy (IPPs and imports) forms part of the transmission division cost base.
Management now has to grapple with the IBD split amounting to R416 billion (as at FY20) across the entities, which requires bondholder consultation and approval. Our expectation is that this will not be a swift process. Further details are yet to be revealed, including how the R350 billion guarantee will be segregated, and business cases for each division so that investors can assess each division’s investability.
More importantly, all these interventions do not address Eskom’s core problem: the debt trap. The utility’s management has alluded that more government assistance to the tune of R200 billion will still be needed. It is our view that, regardless of the divisionalisation and liberalisation of the energy sector, a debt solution is still required. Failing this, the debt problem will be inherited by all or some of the soon-to-be established entities.
Some encouragement but concerns remain
Futuregrowth is encouraged by Eskom’s accelerated execution of its long-communicated divisionalisation strategy and government’s equity injection. However, these interventions are barely scratching the surface when it comes to extinguishing Eskom’s solvency risk. The remaining operational inefficiencies and unsustainable debt burden patently require further extra-ordinary support. We are cautiously optimistic that a decisive debt solution will be found, and we are of the view that comprehensive divisional business cases will determine the success (and/or duration) of the debt separation process.
Government’s recent intervention does indicate that Eskom remains important to the state and that the likelihood of government support is still high. However, these intermittent interventions do not solve the going concern risk status of Eskom, and its high dependency on the shareholder. Eskom needs more than just unbundling to address its solvency and liquidity risk.
Threats to biosecurity, biodiversity and food security – are we doing enough?
The National Science and Technology Forum (NSTF) hosted a NSTF Discussion Forum on ‘Plant Health in South Africa – threats to biosecurity, biodiversity and food security’. It was an event two years in the planning and an extension of 2020 being declared the ‘International Year of Plant Health’ by the United Nations.
Plants are part of ecosystems – both causing an effect and being affected. Think of plants and the increasing demand for food, with the decrease of fertile land, and the interplay with climate change. Plant health is intrinsically linked to the survival of our planet and all that live on it. If we care about the eradication of poverty, the critical nature of food security, and the importance of nutrition, then we care about plant health.
Insects and pathogens
For the NSTF Discussion Forum, Prof Michael Wingfield honed in on pests and diseases. Wingfield is a 2020 NSTFSouth32 Award Winner in Plant Health. He is currently advisor to the University of Pretoria Executive and was the Founder Director of the Forestry and Agricultural Biotechnology Institute (FABI) at the university. Wingfield is one of South Africa’s plant health stars, internationally recognised for his extensive research on insect pests and diseases of forest trees.
Pathogens and pests have a very negative impact on trees and will continue to do so, says Wingfield. Take Dutch Elm Disease where pathogens are carried by insects. It was introduced accidentally into Europe and North America and then caused devastation in the natural environment.
In South Africa, a recent example is the Polyphagous Shot Hole Borer (PSHB) and its fungus. Together these organisms can be aggressive tree killers, explains Prof Wilhelm de Beer, Associate Professor in Biochemistry, Genetics and Microbiology Department, FABI. It’s of major concern to farmers, foresters, landscapers, homeowners and ecologists. (De Beer provided further details in his presentation.)
Impact of trade
The movement of people and our products – travel and shipping – has resulted in pests and pathogens moving around the world. Wingfield says that, since 1980, 70% of new pathogens were likely introduced via the live plant trade. (Source: ‘Biogeographical patterns and determinants of invasion by forest pathogens in Europe’, New Phytologist)
The solution isn’t going to be shutting this trade down. Wingfield’s data shows that, as of 2016, global floral crops (such as cut flowers and flower bulbs) were valued at US$55 billion. The tree nursery crops (trees, shrubs and other hardy plants) were valued at US$35 billion. There needs to be a balance between controlling plants (that may carry pests and pathogens) and the needs of the plant industry.
Wingfield says solutions cover a wide range, for example: • Selecting plants with resistance to the pathogens • Innovative biological controls • Chemical controls which can be used safely at times • Quarantine • Applying national and international policies which fall under biosecurity (ie the policy and regulatory frameworks for analysing and managing relevant risks to human, animal and plant life and health) • Using DNA sequencing and the tools associated with it
Understanding plant pathology
Plant pathology (or phytopathology) is concerned with the inter-relationships of the pathogen and host, ecologically and in relation to the total environment, says Prof Wijnand Swart. It includes society – not only the impact on people but the effects from people’s political and economic decision-making and actions.
Swart is President of the Southern African Society for Plant Pathology and Professor of Plant Pathology at the University of the Free State, Bloemfontein. (See his projections on plant pathology over the next 50 years.) There is a range of potential future plant health technologies to consider. Think biosensors that identify pathogens in real-time. Or plant defense activators where biological agents modulate plant resistance. How about manipulating microbiomes for recruiting more effective microorganisms for biocontrol? The future looks interesting.
Swart emphasised a systems-thinking approach when it comes to plant pathology. We need to consider plant health on and across all levels (from climate change to DNA and even smaller) and the interplay between and across all the systems. This means that, within agricultural systems, it’s necessary to integrate efforts across the diverse components. This includes areas like weather modelling, pollinators, nutrients, soils, microbes, and plants.
Each component requires specialisation and, at the same time, needs to be seen as part of a larger system with the feedback loops that exist within systems. Focusing in on the components for plant health, consider the importance of climate change and weather modelling. Prof Sue Walker presented on ‘Use of Crop-Climate Models to Develop Advisories’. She is the Principal Researcher: Agrometeorology at ARC-NRE in Pretoria. (ARCNRE stands for Agricultural Reseach Council (ARC) Natural Resources and Engineering (NRE) (Soil, Climate and Water & Agricultural Engineering)). Models are essential for scenario planning with, for example, farming crops. Walker points out that temperature variation can cause a significant decrease of up to 20% in crop production and this needs to be managed.
Another highlighted area is that of pesticide use. Dr Roger Price, Research Team Manager at ARC, says that there is an escalating cost to the increasing application of pesticides. It ranges from environmental concerns to the build-up of insecticide resistance. He says it’s a crisis situation now – we can’t have production at all costs and just continue to spray. It just isn’t sustainable. We need to use the resources around us such as natural enemies. He notes that farmers will have to switch production or go out of business. Price presented on the ‘Threat of migratory and invasive insect pests to food security in South Africa’.
Developing early warning systems
Jan Hendrik Venter, from the Department of Agriculture, Land Reform and Rural Development (DALRRD), says that even with legislation, pests are spreading at a tremendous rate. There is a battle being played out and we need more data, more detection, more scanning, and more collaboration with scientists. He says that we need multiple levels of collaboration and response – national, regional and global. (Venter presented on ‘Biosecurity and early warning systems’.)
Venter says pest notification is critical, and it involves all stakeholders, from individuals and local communities to country level. Many countries don’t want to reveal the existence of pests due to the negative effect on the economy, among other things.
In South Africa, there are some interesting developments around pest and disease notification for plants. An example is the surveillance app being built by FABI along with CropWatch Africa and the Information Hub, Innovation Africa. Prof Dave Berger, from the Department of Plant and Soil Sciences, FABI spoke on this. He is the 2016 NSTF Special Annual Theme Award Winner: Agriculture and Food Security.
Berger specialises in maize diseases. He and the various interdisciplinary teams are using artificial intelligence to create an app for identifying maize diseases from uploaded photos. They are currently improving on 75% accuracy. The app focuses on Grey Leaf Spot Disease but the aim is to expand the range of diseases and to scale the app countrywide.
Role of natural science collections and biobanks
The Natural Science Collections Facility (NSCF) South Africa focuses on preserved, non-living collections of plants, animals, fossils and fungi. It’s a network of 16 institutions, including museums, science councils and three university herbaria. South Africa also has Biodiversity Biobanks South Africa (BBSA). Here the scope is long-term preservation of samples, from frozen plant and animal tissues and DNA extracts to gene banks and microbial cultures. It includes agricultural biobanks. Prof Michelle Hamer says that BBSA is only really getting going now. Hamer is the Director of NSCF at the South African National Biodiversity Institute. She presented on the role these collections play.
So why do we need them? Hamer says that it’s about knowing what species we have, where they have been recorded, and how this has changed over time. The collections span over almost 200 years and historical data allows changes in distribution over time to be mapped. The data is an important resource. There are opportunities in a multitude of research areas, says Hamer, from conservation of threatened species to the rehabilitation of ecosystems. Think understanding the extent of invasive species or using the collections and biobanks as a reference for identifying biological materials.
Hamer says both the NSCF and the BBSA have been neglected, which is strange considering South Africa’s biodiversity. Biorepositories are a critical foundation in plant health yet their importance is poorly understood by decision-makers, funding agencies, public and even the research community.
What else can be done?
Wingfield noted that there should be more focus on global collaboration – that there is a good example to be seen with the international cooperation around Covid-19. Swart sees major opportunities in using Big Data for unprecedented gathering and analysis, as well as the need to investigate anti-microbial resistance further. The latter is a challenge that is growing in significance.
Swart says the One Health approach is becoming even more necessary for future plant pathologists as the need for further integration across human, animal, plant, and environmental health sectors grows. One Health represents the collaboration of multiple disciplines working to achieve optimal health for people, animals, plants, and the environment.
Prof Robin Crewe is the 2019 NSTF-South32 Lifetime Award winner. He presented on ‘Are there enough honeybees for sustainable food production’. One of the key concerns is that provision of pollination services depends on a single bee species, the Western honeybee. Furthermore, we can’t manage the problem currently as we have almost no strategic data (eg colony density).
Dr Candice-Lee Lyons presented on ‘Managing the risks to biodiversity using insects: Biocontrol in South Africa’. She is from the Biological Sciences Department, University of Cape Town and the School of Life Sciences, La Trobe University, Victoria, Australia. Biocontrol focuses on introducing natural enemies to control invasive weed densities. Lyons says it is about a long-term self-perpetuating solution that is sustainable, environmentally non-damaging, and relatively inexpensive.
Prof Willem Boshoff is an Associate Professor: Plant Sciences, Faculty: Natural and Agricultural Sciences, University of the Free State. He presented on ‘Disease resistance in small grain cereals: The South African approach’. The focus was on rust diseases.
Climate and Biodiversity Crisis: 16 Critical points for leaders to act on
As the Climate and Biodiversity Crises augment each other, EASAC’s new commentary informs both the UN Glasgow Climate Summit and the Biodiversity Summit in China that there are 16 shared points to note
The recent IPCC report confirms that global warming is speeding up. Meanwhile, the hidden crisis of biodiversity loss continues with the loss of forests to land clearance, exacerbated by the fires. The Commentary’s summary of the European Academies Science Advisory Council’s (EASAC) ten years of scientific analysis covering environmental, energy and biosciences is set against the scary backdrop of an inexorable increase in temperature and humidity expanding in some areas to levels where it is difficult or impossible for humans or the crops and livestock they need to survive. Adding science too recent to have been included in the IPCC Report, Europe’s Science Academies urge governments to treat the Climate and Biodiversity Crises as one, and as equally urgent.
Climate and Biodiversity Crises to be treated as one
“This summer’s rollercoaster of extreme temperatures, dryness, flash floods and wildfires has been bad, but probably far better than what we may see in the future,” explains Prof. Michael Norton, EASAC’s Environment Programme Director. “Biodiversity loss and dangerous climate change potentiate each other in their disastrous consequences. It’s a vicious circle not only leading to extreme weather but also collapsing food systems, and increasing risks of dangerous pathogens, zoonoses and other health impacts.”
The Commentary illustrates the multiple crises interactions: replacing tropical forests with agriculture reduces biodiversity at the same time as releasing stored carbon, reducing carbon uptake in the land and increasing emissions of other greenhouse gases (GHGs). Warming temperatures and associated changes to precipitation reduce agricultural productivity as well as moving species outside their habitable range, in some cases driving them to extinction. Warming and acidifying oceans alongside weakened circulation reduce the oceans’ capacity to absorb and remove carbon dioxide (CO2) from the atmosphere while shifting or degrading ecosystems.
Exit from the road to our own destruction
But the scientists also see opportunities: conserving, managing and restoring ecosystems for example can mitigate climate change and enable adaptation to its impacts while also enhancing biodiversity. “These challenges do have solutions but so far both the Climate Change and the Biodiversity Conventions separately have lacked the political will to implement them, or policy-makers have taken easy ways out without properly considering the consequences,” says Norton “The classic example is the failure to properly assess climate impacts of burning trees for electricity before allocating billions in subsidies. The two meetings in autumn need to map an exit from the current road that leads to our own destruction.”
Based on EASAC’s past work, the Commentary includes a list of 16 fields for action where governments should already have done more. They straddle climate change, the role of biomass energy, greenhouse gas emissions from different oil feedstocks, policies towards slashing emissions in transport, buildings and infrastructure, and the interactions between climate change and human health.
Relying on the GDP-based system not going to work
Systemic issues such as the barriers to the transformative changes required to tackle the Climate and Biodiversity Crisis are also addressed. “Relying on the current system to deliver the necessary reductions is not going to work”, says Norton. “The GDP-based economic system in which fossil fuel, food and agricultural interests are driving up CO2 levels, deforestation, land clearing and over-fishing is no longer fit for purpose if atmospheric levels of greenhouse gases must be cut in as short a period as possible.” The scientists make clear that governments need to push the reset button. If humanity wants to stop climate change and preserve the biodiversity that it needs for survival, it must change the economic system to one that rewards and incentivises sustainable choices and behaviour.
Focus on tipping points distracting from seriousness of underlying linear trends
Ever since the Paris Climate Summit in 2015, there has been much focus on tipping points. But according to EASAC, catastrophically disrupting trends are proceeding as gradual incremental changes as well. “The focus on tipping points creates an image of relay points up to which climate change can be seen as ‘safe’. However, not only do different tipping points interact with each other and increase the dangers, but the underlying linear trends such as temperature and humidity are serious in their own right,” Norton explains.
Chance for coordinated, bold and transformative action
“As parents and grand-parents/ we are as terrified as everyone else by what we see coming. But as scientists, we know that there are ways to mitigate the worst and adapt. But only if governments in Europe and worldwide take responsibility and show leadership now”, says Lars Walloe, Chair of EASAC’s Environment Programme.
With the closely related policy agendas of the Climate Summit and the Biodiversity Summit, negotiators have the opportunity to take coordinated, bold and transformative action to deliver a new, more integrated and coherent framework for addressing biodiversity loss and climate change together. The urgency is such that both need to work together now, take advantage of the many potential synergies between climate change and biodiversity policies – such as massive ecosystem restoration – and change humanity’s course towards a sustainable future.
EASAC (2013) Trends in extreme weather events in Europe: implications for national and European Union adaptation strategies EASAC (2015) Ecosystem services, agriculture and neonicotinoids EASAC (2016) Greenhouse gas footprints of different oil feedstocks EASAC (2017a) Multi-functionality and sustainability in the European Union’s forests EASAC (2017b) Valuing dedicated storage in electricity grids EASAC (2017c) Opportunities and challenges for research on food and nutrition security and agriculture in Europe EASAC (2018a) Commentary on forest bioenergy and carbon neutrality EASAC (2018b) Negative emission technologies: what role in meeting Paris Agreement targets? EASAC (2018c) Opportunities for soil sustainability in Europe EASAC (2018d) Extreme weather events in Europe. Preparing for climate change adaptation EASAC (2019a) Forest bioenergy, carbon capture and storage, and carbon dioxide removal: an update EASAC (2019b) Decarbonisation of Transport: options and challenges EASAC (2019c) The imperative of climate action to protect human health in Europe EASAC (2020a) Hydrogen and synthetic fuels EASAC (2020b) Towards a sustainable future: transformative change and post-COVID-19 priorities EASAC (2020c) How can science help to guide the European Union’s green recovery after COVID-19? EASAC (2021a) Decarbonisation of buildings: for climate, health and jobs EASAC (2021b) Policy briefs to the Scientific Group of the UN Food Systems Summit 2021 EASAC (2021c) A sea of change: Europe’s future in the Atlantic realm EASAC and FEAM (2021) Decarbonisation of the health sector
Energy regulations a positive move, but further clarity still required
MEC David Maynier on schedule 2 of the Electricity Regulation Act gazetted by Minister Gwede Mantashe
We welcome the gazetting of Schedule 2 of the Electricity Regulation Act by the Minister of Mineral Resources and Energy, Gwede Mantashe, which gives effect to the announcement by President Cyril Ramaphosa to increase the licensing threshold for embedded generation projects from 1 MW to 100 MW.
This is a positive move towards a more open, diverse and competitive energy sector and will give much-needed certainty to investors and facilitate quicker uptake and access to affordable, renewable energy to meet the current energy shortfall in South Africa.
However, these amendments do not go far enough to urgently address the energy and climate crisis facing the country.
Recent statistics from the CSIR show that by mid-June of this year, load shedding figures (1268GWh) had almost reached the same amount of load shedding that was experienced for the entire year in 2019 (1352GWh).
Large-scale private sector participation in energy generation, in partnership with government, will be key to addressing the current shortfall in the Western Cape.
And so, we urge the minister to provide further clarity on the potential role of municipalities as a reseller as it is currently unclear if municipalities will be able to buy energy from an independent power producer and then sell it on to their customers, or whether it is limited to buying energy only for its own consumption.
We also urge the minister to ensure that the registration process is streamlined as this risks becoming a complex spiderweb of red tape that could undermine the implementation of renewable energy projects and lose the opportunity provided through the licensing exemptions threshold increase.
This clarity will be critical to the success of the Western Cape’s Municipal Energy Resilience (MER) Initiative which seeks to support municipalities to implement renewable energy projects in municipalities across the province so that municipalities, businesses and households can generate, procure and sell electrical energy.
By contributing to an increasingly decentralised system of low carbon energy generation and distribution that will help to mitigate the risk of load shedding in South Africa, the MER Initiative will help to boost business confidence and contribute to economic growth and job creation in the Western Cape.
Importantly also, the MER Initiative will contribute to the fight against climate change, which is more important than ever given the recent findings and recommendations of the Intergovernmental Panel on Climate Change (IPCC) 6th assessment report released this week.
The renewable energy sector in South Africa has the potential to attract much-needed investment that create jobs. The amendments to Schedule 2 of the Electricity Regulation Act are a significant step in the right direction, but I also urge the Minister of Mineral Resources and Energy, Gwede Mantashe, to ensure that the proposed amendments to the Electricity Regulation Act clarify and simplify the current regulatory challenges to unlock these opportunities in the Western Cape.
DMRE on amended schedule 2 of Electricity Regulation Act 4 of 2006
The Department of Mineral Resources and Energy gazetted the Amended Schedule 2 of the Electricity Regulation Act 4 of 2006 on 12 August 2021, for 100 megawatts of embedded electricity generation as approved by Minister Gwede Mantashe.
The amendment follows President Ramaphosa’s announcement on 10 June 2021 that the Schedule 2 Amendment of the ERA would be published within 60 days. The Amendment serves to increase the threshold for embedded generation from the current 1 megawatt (MW) to 100MW without the need for a license. The intervention to reform the electricity regulation regime has been hailed as a positive way forward by the energy sector and industry across the board. It is envisaged that this step will unlock significant investment in new generation capacity in the short-to-medium term, and make significant inroads towards achieving national energy security, as well as reduce the impact of load shedding across the country.
Under the newly gazetted Amended Schedule 2 of the ERA, applicants for 1 – 100MW embedded electricity generation projects will now be exempt from the obligation to apply for a Licence but, will be required to register with the National Energy Regulator of South Africa (NERSA.)