Low carbon finance in South Africa, Phase 1 & 2 study February 2018 A working paper for the World Bank DOCUMENT STATUS This working paper constitutes the final deliverable in terms of the project entitled “Technical Assistance for South Africa Low Carbon Finance Study (Component 1 and 2)” for the World Bank, implemented by DNA Economics and The Green House. AUTHORS Brent Cloete Brett Cohen Yvonne Lewis Samantha Munro Yash Ramkolowan 3rd Floor, South Office Tower, Hatfield Plaza, 1122 Burnett Street, Hatfield, Pretoria, 0083, South Africa ii PO Box 95838, Waterkloof, 0145, South Africa Tel +27 (0)12 362 0025 | Fax +27 (0)12 362 0210 | Email contact@dnaeconomics.com | www.dnaeconomics.com DNA Economics (Pty) Ltd Company Registration: 2001/023453/07│Directors: Brent Cloete, Amanda Jitsing, Elias Masilela, Matthew Stern Low carbon finance study (Phase 1 and 2) The World Bank TABLE OF CONTENTS LIST OF TABLES .................................................................................................................................. V LIST OF FIGURES .............................................................................................................................. VII LIST OF BOXES ................................................................................................................................... IX LIST OF ACRONYMS ........................................................................................................................... X EXECUTIVE SUMMARY .................................................................................................................. XIV The industrial sector in South Africa .....................................................................................................xv Financing of low carbon investments .................................................................................................. xvi Gaps and barriers to low carbon finance (summary) ......................................................................... xvi Factors influencing demand for finance ............................................................................................ xviii Factors influencing the supply / availability of finance ....................................................................... xxii Possible interventions ........................................................................................................................ xxvi Conclusion ........................................................................................................................................ xxviii 1 BACKGROUND .......................................................................................................................... 1 2 OBJECTIVES AND APPROACH .............................................................................................. 2 3 THE HEAVY INDUSTRY SECTOR IN SOUTH AFRICA......................................................... 5 3.1 Focus sectors ............................................................................................................................... 6 3.2 The importance of South Africa’s industrial base to its economy .............................................. 6 3.3 Mining and manufacturing investment trends............................................................................. 9 3.4 Performance of individual heavy industry sectors .................................................................... 14 4 ENERGY AND GREENHOUSE GAS EMISSIONS PROFILES OF HEAVY INDUSTRY .. 51 4.1 Industry energy input costs ........................................................................................................ 51 4.2 South African electricity price and supply conditions ............................................................... 54 4.3 Sector-level energy and GHG emissions profiles..................................................................... 58 5 FINANCING LOW CARBON INVESTMENTS ....................................................................... 77 5.1 South Africa’s financial sector.................................................................................................... 77 5.2 Providers of low carbon finance in South Africa ....................................................................... 78 5.3 Mechanisms and instruments.................................................................................................... 83 6 POTENTIAL LOW CARBON INVESTMENT OPTIONS ....................................................... 88 6.1 Introduction ................................................................................................................................. 88 6.2 Mining ......................................................................................................................................... 88 iii Low carbon finance study (Phase 1 and 2) The World Bank 6.3 Chemicals ................................................................................................................................... 92 6.4 Petroleum products .................................................................................................................... 95 6.5 CTL and GTL.............................................................................................................................. 96 6.6 Cement ....................................................................................................................................... 99 6.7 Iron and Steel and ferroalloys .................................................................................................. 100 6.8 Non-ferrous metals................................................................................................................... 102 6.9 Glass ......................................................................................................................................... 104 6.10 Pulp and paper ......................................................................................................................... 105 7 GAPS AND BARRIERS TO LOW CARBON FINANCE ..................................................... 106 7.1 Factors influencing demand for finance .................................................................................. 108 7.2 Factors influencing the supply / availability of finance ............................................................ 115 8 POSSIBLE INTERVENTIONS ............................................................................................... 120 8.1 Policy interventions .................................................................................................................. 120 8.2 Interventions targeting finance providers ................................................................................ 121 8.3 Interventions targeting the energy market .............................................................................. 122 9 CONCLUSION ......................................................................................................................... 122 REFERENCES................................................................................................................................... 123 APPENDIX 1 CONTEXTUALISING SA’S CLIMATE CHANGE POLICY............................... 142 APPENDIX 2 DATA CLASSIFICATION FOR SECTOR ANALYSIS ...................................... 146 APPENDIX 3 DESCRIPTION OF LOW CARBON INVESTMENT OPTIONS ........................ 148 APPENDIX 4 SUMMARY LITERATURE REVIEW ................................................................... 163 APPENDIX 5 IDENTIFIED PROVIDERS OF LOW CARBON FINANCE ............................... 176 APPENDIX 6 ENERGY INPUT COSTS BASED ON SUPPLY-USE TABLES ...................... 186 APPENDIX 7 BENCHMARKING CHALLENGES..................................................................... 187 APPENDIX 8 STAKEHOLDER ENGAGEMENTS AND SUMMARY OF ANALYSIS ........... 192 iv Low carbon finance study (Phase 1 and 2) The World Bank LIST OF TABLES Table 1: South Africa's NDC mitigation activities ...................................................................................................................... 1 Table 2: Coal Production and Market Share, 2016...................................................................................................................17 Table 3: Gold Production and Market Share 2016 Data ..........................................................................................................22 Table 4: Petroleum (refineries) ownership and capacity ........................................................................................................33 Table 5: Cement Production Capacity and Market Share ......................................................................................................37 Table 6: Glass Production Capacity and Market Share ..........................................................................................................47 Table 7: Energy input by sector using Input-Output tables (2014) – based on input costs ...........................................53 Table 8: Eskom Load Shedding Schedule 2007-2017.............................................................................................................54 Table 9: Anticipated changes in the levelised cost of electricity, 2013 (R/kWh) ...............................................................56 Table 10 Average prices per technology (R/kWh) for different REI4P bid windows ........................................................57 Table 11: Energy usage in the mining and quarrying sector in South Africa in 2014......................................................58 Table 12: GHG Emissions from the mining and quarrying sector in South Africa in 2014 ............................................59 Table 13: Energy usage by Exxaro in 2015 (coal mining) ......................................................................................................60 Table 14: Order of magnitude estimate of emissions from coal mining sector in 2014 (Mt CO2e) ...............................61 Table 15: Energy usage by Pan African Resources (Platinum Group Metals (PGMs) and Gold) .................................61 Table 16: Energy usage by Anglo American Platinum in 2015 .............................................................................................62 Table 17: Order of magnitude estimate of emissions from precious metals sector in 2014 (Mt CO2e) .......................62 Table 18: Energy usage by Kumba Iron Ore and Assmang iron division during 2015 ...................................................63 Table 19: Energy usage by Assmang manganese and chromite divisions in 2015.........................................................63 Table 20: Order of magnitude estimate of emissions from other mining sector in 2014 (Mt CO2e) .............................63 Table 21: Indicative energy usage in the chemical and petrochemical sector in South Africa during 2014 ..............64 Table 22: Order of magnitude estimate of emissions from chemicals sector in 2014 (Mt CO2e) ..................................65 Table 23: Indicative energy usage in the crude oil refining sector in South Africa during 2014 ...................................66 Table 24: Energy usage by Sapref in 2014 ................................................................................................................................66 Table 25: Order of magnitude estimate of emissions from crude refining sector in 2014 (Mt CO2e) ...........................67 Table 26: Order of magnitude estimate of emissions from CTL and GTL sector (Mt CO2e) ..........................................67 Table 27: Indicative energy usage in the cement sector in South Africa during 2014.....................................................68 Table 28: Energy usage by PPC (cement producer) in 2014 financial year .......................................................................69 Table 29: Order of magnitude estimate of emissions from cement sector in 2014 (Mt CO2e) .......................................69 Table 30: Indicative energy usage in the iron and steel and ferroalloys sector in South Africa in 2014 .....................70 Table 31: Energy usage by AMSA (steel producer) in 2015 ..................................................................................................71 Table 32: Energy usage by Exxaro Ferroalloys in 2016 .........................................................................................................72 Table 33: Order of magnitude estimate of emissions from iron and steel sector in 2014 (Mt CO2e)............................72 Table 34: Order of magnitude estimate of emissions from the ferroalloy sector in 2014 (Mt CO2e) ............................72 Table 35: Indicative energy usage in the non-ferrous metals sector in South Africa during 2014 ...............................73 Table 36: Order of magnitude estimate of emissions from non-ferrous metals sector in 2014 (Mt CO2e)..................74 Table 37: Order of magnitude estimate of emissions from glass sector in 2014 (Mt CO2e) ...........................................74 Table 38: Indicative energy usage in the pulp, paper and print sector in South Africa in 2014.....................................75 Table 39: Order of magnitude estimate of emissions from pulp and paper sector in 2014 (Mt CO2e) .........................76 Table 40: On-balance sheet vs. project-based financing .......................................................................................................84 Table 41 Low carbon investment options in coal mining ......................................................................................................89 Table 42 Low carbon investment options in gold and platinum mining.............................................................................90 v Low carbon finance study (Phase 1 and 2) The World Bank Table 43 Low carbon investment options in iron ore mining................................................................................................91 Table 44 Low carbon investment options in nitric acid production ....................................................................................93 Table 45 Low carbon investment options in polymer production .......................................................................................94 Table 46 Low carbon investment options in carbon black production...............................................................................95 Table 47 Low carbon investment options in refining ..............................................................................................................96 Table 48 Low carbon investment options in CTL and GTL ...................................................................................................97 Table 49 Low carbon investment options in cement ..............................................................................................................99 Table 50 Low carbon investment options in iron and steel .................................................................................................100 Table 51 Low carbon investment options in ferroalloys ......................................................................................................102 Table 52 Low carbon investment options in aluminium smelting .....................................................................................103 Table 53 Low carbon investment options in glass ................................................................................................................104 Table 54 Low carbon investment options in pulp and paper ..............................................................................................105 Table 55: Summary of selected state-led policies and initiatives geared towards climate change ...........................143 Table 56: Level of aggregation of data provided....................................................................................................................146 Table 57: Description of options for Aluminium ....................................................................................................................148 Table 58: Description of options for Cement ..........................................................................................................................149 Table 59: Description of options for Chemicals .....................................................................................................................150 Table 60: Description of options for Coal ................................................................................................................................152 Table 61: Description of options for Coal to Liquid...............................................................................................................152 Table 62: Description of options for Ferroalloys....................................................................................................................154 Table 63: Description of options for Glass ..............................................................................................................................155 Table 64: Description of options for Iron and Steel ...............................................................................................................157 Table 65: Description of options for Liquid Fuels..................................................................................................................159 Table 66: Description of options for Mining: Non-Coal ........................................................................................................160 Table 67: Description of options for Paper and Pulp ............................................................................................................161 Table 68: Description of options for PGM’s and Gold ..........................................................................................................161 Table 69: Private Sector Finance Market Institutions............................................................................................................176 Table 70: Public sector incentives and programme institutes............................................................................................181 Table 71: DFIs, donors and other public sector funds and funding pool institutions ...................................................184 Table 72 Energy input by sector using Supply-Use tables (2015) – based on supply costs .......................................186 Table 73: Emission intensities of two coal mining operations in South Africa ...............................................................187 Table 74: Emission intensities of various precious metal mining operations in South Africa ....................................188 Table 75: Emission intensities of various other mining operations in South Africa......................................................188 Table 76: Emission intensities of various crude refining operations in South Africa ...................................................189 Table 77: Emission intensities of various iron and steel works in South Africa.............................................................190 Table 78: Proposed electricity consumption and emission intensity benchmarks (iron and steel sector) ..............191 Table 79: Emission intensities of various ferroalloy works in South Africa ....................................................................191 Table 80: Indicative benchmark values for the South African ferro-alloys sector..........................................................191 Table 81: Summary of low carbon investment options ........................................................................................................193 Table 82 Characterisation of large options (R50 million and more) not attractive for financing, by sector..............195 Table 83 Large low carbon investment options (R50 million and more) by sector and type of option .....................196 Table 84 Strengths and weaknesses of selected support programmes ..........................................................................198 vi Low carbon finance study (Phase 1 and 2) The World Bank LIST OF FIGURES Figure 1: Summary of identified low carbon investment gaps and barriers....................................................................xvii Figure 2: Feasibility of low carbon investments in heavy industry sectors (number of investment options) ..........xix Figure 3: Mining and manufacturing contribution to real GDP ............................................................................................... 6 Figure 4: Real GDP growth since 2007......................................................................................................................................... 7 Figure 5: Private sector employment (Index, 2010 = 100) ........................................................................................................ 8 Figure 6: Share of total formal sector employment (excluding agriculture) ........................................................................ 8 Figure 7: Real GFCF (investment) in South Africa (2010 constant prices).........................................................................10 Figure 8: Real GFCF (investment) in South Africa (2010 constant prices), by economic activity ................................11 Figure 9: Real GFCF (investment) in mining and manufacturing (2010 constant prices)...............................................12 Figure 10: Real fixed capital stock by sector (constant 2010 prices) ..................................................................................13 Figure 11: Coal market summary (R billion, 2014) ...................................................................................................................15 Figure 12: Coal production (Index, 2010 = 100) ........................................................................................................................16 Figure 13: South Africa’s coal exports and imports (R million)............................................................................................16 Figure 14: Gold, uranium and metal ores market summary (R billion, 2014) ....................................................................19 Figure 15: PGMs and gold production (Index, 2010 = 100) ....................................................................................................20 Figure 16: South Africa’s PGM exports and imports (R million) ..........................................................................................21 Figure 17: South Africa’s gold exports and imports (R million) ...........................................................................................21 Figure 18: Other mining production (Index, 2010 = 100) ........................................................................................................24 Figure 19: South Africa’s other mining exports and imports (R million) ............................................................................25 Figure 20: Nuclear fuel, basic chemicals market summary (R billion, 2014) .....................................................................27 Figure 21: Other chemicals, man-made fibres market summary (R billion, 2014)............................................................27 Figure 22: Chemicals production (Index, 2010 = 100) .............................................................................................................28 Figure 23: Chemicals sector capacity utilisation (percentage) .............................................................................................29 Figure 24: South Africa’s chemical exports and imports (R million) ...................................................................................29 Figure 25: Coke, petroleum market summary (R billion, 2014).............................................................................................31 Figure 26: Petroleum, coke and nuclear fuel production and capacity utilisation ...........................................................32 Figure 27: South Africa’s petroleum exports and imports (R million).................................................................................32 Figure 28: Non-metallic mineral products market summary (R billion, 2014) ...................................................................35 Figure 29: Non-metallic mineral production and capacity utilisation ..................................................................................36 Figure 30: South Africa’s cement exports and imports (R million) ......................................................................................36 Figure 31: Iron, steel and metal casting market summary (R billion, 2014) .......................................................................38 Figure 32: Iron and steel (incl. ferrous alloys) production and capacity utilisation .........................................................39 Figure 33: South Africa’s iron and steel exports and imports (R million) ..........................................................................40 Figure 34: South Africa’s ferrous alloys exports and imports (R million) ..........................................................................40 Figure 35: Precious and non-ferrous metals market summary (R billion, 2014)...............................................................43 Figure 36: Basic precious and non-ferrous metal products production and capacity utilisation ................................43 Figure 37: South Africa’s aluminium exports and imports (R million) ................................................................................44 Figure 38: Glass manufacturing market summary (R billion, 2014) ....................................................................................45 Figure 39: Glass and glass products production and capacity utilisation.........................................................................46 Figure 40: South Africa’s glass exports and imports (R million)..........................................................................................47 Figure 41: Pulp and paper market summary (R billion, 2014) ...............................................................................................48 Figure 42: Paper and Pulp Products- Production (2010 = 100) and capacity utilisation (%) (SIC:323) ........................49 vii Low carbon finance study (Phase 1 and 2) The World Bank Figure 43: South Africa’s pulp and paper exports and imports (R million)........................................................................49 Figure 44: Indices of GDP in volume terms and annual electricity production, 2000 to 2016 (2000 = 100) ................55 Figure 45: Average price trend for electricity in South Africa (2007-2017).........................................................................55 Figure 46: Average increase trend for electricity prices in South Africa (2007-2017)......................................................56 Figure 47 Energy balance data in the mining and quarrying sector over time (excl. coal mining)...............................59 Figure 48 GHG emissions profile of the mining and quarrying sector ...............................................................................60 Figure 49 Energy balance data for the chemical and petrochemical sector over time ...................................................65 Figure 50 Energy balance data for energy demand in the non-metallic minerals sector over time .............................68 Figure 51 Energy balance data for iron and steel and ferroalloys over time .....................................................................71 Figure 52 Energy balance data for the paper, pulp and print sector over time .................................................................76 Figure 53: Assets in non-bank financial institutions, 2016 (R billion) .................................................................................77 Figure 54: Domestic credit extended by South African monetary sector, 2016 (R billion) .............................................78 Figure 55: Financing instruments available for low carbon investments ..........................................................................85 Figure 56: ESCO revenue and operating models ....................................................................................................................87 Figure 57: Summary of identified low carbon investment gaps and barriers .................................................................107 Figure 58: Feasibility of low carbon investments in heavy industry sectors (number of investment options) .......110 Figure 59: Policy framework and green economy sector initiatives in SA.......................................................................142 Figure 60 Distribution of financeable low carbon investment options by size ...............................................................194 Figure 61 Support programmes considered or utilised for low carbon projects ...........................................................197 Figure 62 Support programme satisfaction score .................................................................................................................198 Figure 63: Barriers to low carbon investment raised by heavy industry ..........................................................................199 Figure 64: Recommendations to increase investment in low carbon projects...............................................................200 viii Low carbon finance study (Phase 1 and 2) The World Bank LIST OF BOXES Box 1 Definition of low carbon activities ..................................................................................................................................... 2 Box 2 Identification and assessment of low carbon activities ................................................................................................ 4 Box 3: Challenges and implications low-carbon development policies on heavy industry ............................................ 5 Box 4: Issues of aggregation and concordance in industry data ........................................................................................14 Box 5: Disruptions in the mining industry.................................................................................................................................14 Box 6 Note on benchmarking South Africa industry's energy and emissions profile ....................................................51 Box 7: Green / climate finance in South Africa .........................................................................................................................79 Box 8 Possible low carbon support mechanisms included in stakeholder engagement discussion guides ...........83 Box 9: Green bonds in South Africa ...........................................................................................................................................86 Box 10 Natural gas market in South Africa ...............................................................................................................................98 Box 11 Mandates of selected public sector entities that could impact low carbon activities......................................113 ix Low carbon finance study (Phase 1 and 2) The World Bank LIST OF ACRONYMS AFD Agence Française de Développement AMCU Association of Mineworkers and Construction Union AMSA Arcelor Mittal SA B-BBEE broad-based black economic empowerment BEE black economic empowerment BF blast furnace BOF blast oxygen furnace BUSA Business Unity South Africa Capex capital expenditure CCS carbon capture and storage CCU carbon capture and use CDM Clean Development Mechanism CDP carbon disclosure project CER certified emission reduction CHP combined heat and power COP Conference of the Parties CSP concentrated solar power CTL/GTL coal-to-liquid/gas-to-liquid DBSA Development Bank of South Africa x Low carbon finance study (Phase 1 and 2) The World Bank DEA Department of Environmental Affairs DFI development finance institutions DMR Department of Mineral Resources DoE Department of Energy DRI direct reduced iron DSM demand side management DST Department of Science and Technology DTI Department of Trade and Industry EAF electric arc furnace ESCO energy services company GCF Green Climate Fund GDP gross domestic product GEF Global Environment Facility GFCF gross fixed capital formation GHG greenhouse gas GTL gas-to-liquids HFO heavy fuel oil IDC Industrial Development Corporation IDM integrated demand management IFC International Finance Corporation xi Low carbon finance study (Phase 1 and 2) The World Bank IPAP Industrial Policy Action Plan IPCC Intergovernmental Panel on Climate Change IPP independent power producer IRP Integrated Resource Plan LNG liquefied natural gas MPA Mitigation Potential Analysis MW megawatt NDC Nationally Determined Contribution NDP National Development Plan NGP New Growth Path Opex operational expenditure OTGC Oiltanking Grindord Calulo PGM platinum-group metals PIC Public Investment Corporation PPA power purchase agreement PV photovoltaic R&D research and development REI4P Renewable Energy Independent Power Producers Procurement Programme RFG refinery fuel gas xii Low carbon finance study (Phase 1 and 2) The World Bank SAPIA South African Petroleum Industry Association SIC Standard Industrial Classification SPV special purpose vehicle VSD variable speed drive xiii Low carbon finance study (Phase 1 and 2) The World Bank EXECUTIVE SUMMARY In line with an increased global focus on sustainable development and mitigating climate change, the National Development Plan (NDP) advocates for a greener economy and envisions a transition to a low-carbon, resilient economy and a just society. For a country like South Africa that built its competitiveness on low-cost electricity generated via historically cheap coal-fired power generation, this will not be an easy or cheap endeavour. The impact of an energy supply crisis, followed by a sharp upward trend in electricity prices, compounded by the impacts of the global financial crisis, have been seen in dismal economic growth since 2007. Developing a prosperous low carbon economy in South Africa will depend on sufficient financing being unlocked to enable a structural transformation in energy supply and use. The NDP emphasises that “using public sources of funding to leverage private investments is critical if adequate resources are to be mobilised”. South Africa’s National Determined Contribution submitted under the UNFCCC concurs by stating that “the key challenge for South Africa is to catalyse, at an economy-wide scale, financing of and investment in the transition to a low carbon and climate resilient economy and society”. This working paper considers barriers to private sector finance for low carbon activities in several priority South African industrial sectors. It does so by considering both the demand and supply of finance for low carbon investment, and identifying gaps in and barriers to financing low carbon investments in South Africa. Low carbon activities are defined as any activity that reduces the greenhouse gas (GHG) emissions from a company, or reduces the carbon intensity of a company over time (i.e. reduces the amount of GHG emissions per unit of output). The working paper aims to go beyond general issues believed to drive or constrain the provision of low carbon finance by focusing on the specific issues1 that drive the decisions to seek and provide financing for low carbon investments within South African industry. Initially the focus of the study was on raising external financing for low carbon activities, but it was decided to expand the analysis to also consider factors that will assist with unblocking corporate finance options. This executive summary provides an overview of the analysis and recommendations. The working paper on which it is based provides significantly more detail to ensure that a comprehensive view of the factors influencing the supply and demand of low carbon investments is developed to underpin the analysis. 1 This included considering the attractiveness of low carbon investment options to both the finance and industrial sectors. Attractiveness was influenced by three factors: 1) whether an option can reasonably be implemented locally without any further development; 2) the cost of an investment; and 3) the operational impact of an investment, namely the length of expected payback period (for investment options that generate positive returns) and the Rand cost to abate a tonne of CO2e (for net cost options). xiv Low carbon finance study (Phase 1 and 2) The World Bank The industrial sector in South Africa South Africa’s industrial base has historically been the cornerstone of the economy, with strong linkages between the mining sector and both the manufacturing and services sectors. However, the contribution of the mining and manufacturing sectors to economic output has experienced a long- term decline. Prior to South Africa’s first free elections in 1994, the mining and manufacturing sectors contributed a combined 31% to South Africa’s gross domestic product (GDP). This contribution to GDP has fallen to less than 22% by the end of 2016. The mining sector has seen a substantial decline in terms of its overall contribution to GDP, almost halving between 1993 and 2016. This trend was prevalent throughout the 2000s, despite the global boom in commodity prices. For the manufacturing sector, on the other hand, the relative decline of the sector accelerated after the 2007/8 global financial crisis. It is not just in relative terms that the mining and manufacturing sectors have been struggling. In only one of the 10 sectors covered by the analysis2, Other Mining, has significant output growth occurred between 2008 and 2016. Of the remaining nine sectors, in only two (Chemicals and Petroleum Products) were 2016 output levels above 2008 levels. This has coincided with declining investment in these sectors. Capital stock in the manufacturing sector has declined since 2008, while it has grown more slowly in the mining sector until the end of 2016. Growing policy uncertainty linked to the publishing of the latest Broad-based Black Socio-economic Empowerment Charter for the South African Mining and Minerals Industry in June 2017, however, has seen investment in this sector grind to a halt. There are large variations in the energy and emissions profiles of the focus sectors, but electricity prices and security of supply were consistently raised as a concern by stakeholders. In addition to the sharp increases in electricity prices (the average price of electricity sold to industrial customers directly by Eskom almost quadrupled from 2007 to 2016, and the price of electricity sold directly to mining customers increased almost five-fold), there were also numerous supply disruptions due to supply constraints over this period. Eskom now has excess supply, but security of supply remains a concern for many stakeholders due to a lack of maintenance on distribution infrastructure.3 A culmination of these factors, coupled with weak demand due to the aftermath of the global financial crisis, has seen electricity demand in South Africa remain below 2007 levels. Some electricity- intensive smelting operations have also relocated to jurisdictions with lower electricity prices. While the importance of mining and manufacturing in the South African economy has decreased over time, it remains an important contributor to economic activity, employment, and export earnings. Electricity prices are increasingly becoming a barrier to these sectors reaching their full potential. Enabling companies to deal with higher prices (by increasing their energy efficiency or enabling access to lower cost electricity) is important from both a climate change and economic growth perspective. 2 The following sectors are covered by the study: Coal Mining; Mining of Precious metals (Platinum Group Metals and Gold); Other Mining (focusing on Manganese and Iron Ore); Chemicals; Petroleum Products; Non-metallic Mineral Products (focusing on Cement); Iron and Steel (including Ferrous Alloys); Non-ferrous Metals (focusing on Aluminium); Glass; and Paper and Pulp. 3 This issue is particularly severe where mining and industrial customers receive their electricity via municipalities. Municipalities also typically sell electricity at a 30-40% mark-up on Eskom tariffs. xv Low carbon finance study (Phase 1 and 2) The World Bank Financing of low carbon investments South Africa has a well-developed domestic finance market, made up of a wide range of stakeholders, including institutional investors (savings, retirement and insurance industries) and the banking (monetary) sector (which includes several national and sub-national development finance institutions. South African institutional and other non-banking finance institutions held more than R8.5 trillion worth of assets in 2016, across insurers, private retirement funds and the Public Investment Corporation (PIC). These assets were allocated to both equity-based and other financing instruments. South Africa’s formal banking market is equally deep. Domestic credit extended by South Africa’s monetary sector (primarily the formal banking institutions) totalled more than R3.5 trillion by the end of 2016. More than half of this credit was extended to companies. In addition to these sources of finance, the South African government also aims to incentivise investment activity through a range of incentives and through several development finance institutions (DFIs). Further investment and financing is undertaken by a range of international DFIs, multilateral institutions and donors. It is difficult to determine the portion of funding that is allocated specifically to ‘low carbon’ activities, or to green / sustainable investments more generally. This is due to a lack of formal definition of what constitutes green finance, responsibility for monitoring green finance flows being split across multiple government departments, programmes and agencies, and the lack of tracking and reporting of green finance by private sector entities. South Africa’s financial market can be considered deep and relatively well resourced. There is also a wide range of sources available for firms wishing to access finance. However, few of these sources explicitly target ‘low carbon’ investments. This is especially true of the instruments and programmes provided by the public sector, which focuses on supporting investment in general, or into specific sectors of the economy. Thus, while it may be evident that there is adequate supply of finance for investment activities, it seems that targeting of low carbon investments, which have peculiar features, is inadequate or may not be targeted by the right type of instruments Gaps and barriers to low carbon finance (summary) Numerous gaps and barriers to low carbon investment were mentioned during the stakeholder consultation process. This is to be expected given the range of activities that qualify as low carbon investments, and the fact a variety of rules and regulations impact on expansion, operation and maintenance activities even when they are not relate to low carbon objectives. A summary of the different gaps and barriers across the demand and supply factors is provided in Figure 1. xvi Low carbon finance study (Phase 1 and 2) The World Bank Figure 1: Summary of identified low carbon investment gaps and barriers Electricity supply and demand for finance Factors influencing price uncertainty is Few low carbon Low cost finance and Commercial driving energy investment options are carbon pricing could efficiency and suitable for external stimulate low carbon factors renewable energy financing investment investments Limited public sector technical capacity. Policy Policy and regulatory Electricity market Low awareness and use uncertainty reforms and strong of existing incentives factors mitigation policy signals lacking. Perception of small Overall lending Factors influencing Investment criteria for supply of finance market of reputable low Concessional finance low carbon projects the same as standard carbon project not viewed favourably and investment implementers and by financiers investments suppliers environment Too few large ESCOs High transaction costs Payback periods relative to project value are constraining Market and generally longer than investment in both desired for low carbon is preventing external small and large low investment financing of smaller carbon investment investments options options structure Drivers, Gaps and Barriers Source: DNA Economics xvii Low carbon finance study (Phase 1 and 2) The World Bank Factors influencing demand for finance Commercial factors Electricity supply and price. Unsurprising, given the sharp increases in electricity prices highlighted earlier, energy prices are the largest driver of low carbon investments in South Africa at present. In addition, security of supply concerns still acts as an important driver of low carbon investments. As mentioned earlier, intermittent supply and outages due to a lack of maintenance on transmission and distribution infrastructure have become increasingly frequent. Some companies have taken over the maintenance of electricity substations even where these are located outside the boundaries of their facilities. Demand for electricity also appears to be becoming more elastic, as there are more options and alternatives becoming viable. It is evident that renewable energy costs have fallen to a level where they can compete with coal for new power generation. The impact of increasing electricity tariffs on firms will influence operating profits and it is likely energy intensive industries will undergo structural changes in the coming years. Moves to shut down or move electricity-intensive activities oversees are already being seen in South Africa. Given the falling costs of renewable energy, there may be an opportunity to reduce this trend via own generation or the increased use of IPPs (both captured and feeding into the national grid). Representatives of all but the most electricity-intensive heavy industry sectors agreed that they consider electricity at stable and predictable prices as critical to the long-term prospects of their sectors, and most believed that renewable energy could play a role in this regard. Perversely, however, the lack off a clear price path for electricity in South Africa is complicating the economic assessment of renewable energy projects, since while the cost of renewables is clear, the benefit in cost savings relative to the price of grid electricity is not. This has caused some stakeholders to delay implementing renewable energy projects. The uncertainty of supply and price of national grid electricity has inadvertently become a key driver influencing the demand for low carbon finance. The lack of a clear price path for electricity in South Africa, however, has caused uncertainty about the returns of long-term electricity generation investments. Feasibility of low carbon options. Numerous low carbon investment opportunities were identified in the focus sectors. However, not all opportunities were considered feasible, either from a technology perspective or because of domestic factors. Stakeholders indicated that investments of below R50 million were typically undertaken internally, and where thus unlikely to be considered for external finance unless they were bundled into a larger programme, or were undertaken by an ESCO or third part that approached a company offering attractive terms. For the identified opportunities with potential for financing, this indicated a clear distinction between opportunities that could be financed through internal or external investment. Just over half of the investments identified were considered as potentially attractive for either internal (requiring investments smaller than R50 million) or external (investment cost of R50 million or larger) financing. xviii Low carbon finance study (Phase 1 and 2) The World Bank For the options not considered feasible, a significant proportion of these were not deemed attractive to finance because the technology or process had not yet been sufficiently proven in South Africa. A small proportion of options were already widely implemented, implying that there were few remaining investment opportunities, or were not feasible because of the current limited availability of natural gas. Figure 2: Feasibility of low carbon investments in heavy industry sectors (number of investment options) Potential for external financing, 51 Options not feasible, 97 Not considered realistic in SA, 58 Widely implemented/ Limited opportunities remaining, 19 No gas, 9 Other and unclear, 11 Potential for internal financing, 56 Source DNA Economics For larger investment opportunities, the likely payback period was identified as a significant constraint for many of the potential investments. Even if companies were not funding constrained, only a small proportion of available low carbon investment options would be attractive from a payback period perspective. Capital would thus rather be deployed to other areas within companies. In addition, the number of feasible external financing options available to specific heavy industries varies widely. Overall, however, there are a relatively low number of attractive low carbon options for external financing across all the sectors considered. This indicates that it would be risky to develop an instrument or approach to support low carbon investment that only focusses on a particular sector (or small set of sectors). Given the large number of small options identified, support to the ESCO market to aggregate these options into investable investment programmes may be warranted. The potential options identified are heavily skewed to energy efficiency and electricity generation. More than 80% of the large options belong in these two categories (roughly equally split), whereas all but one of the small options relate to energy efficiency options. Furthermore, it is encouraging that all but a small minority of options are likely to generate a return even in the absence of a carbon tax or other mitigation instruments. This creates the possibility that low-cost finance (either directly or in conjunction with credit enhancements) could be used to adjust the risk-return profiles of these options xix Low carbon finance study (Phase 1 and 2) The World Bank in a way that makes them attractive for both industrial companies and finance providers. It also bodes well for the efficacy of economic instruments, like the proposed carbon tax, to adjust investment profiles and reduce payback periods. A significant barrier to higher investment is the relative lack of attractive large low carbon investment options. Most options generate a return, which creates the possibility that low-cost finance or carbon pricing can stimulate additional investment. At least some of the large number of smaller options identified could be bundled into larger investment programmes by ESCOs. Policy Policy and regulatory issues. General policy and regulatory uncertainty was identified in both the literature review and stakeholder consultations as a key constraint to low carbon investment. Consultations with stakeholders identified general policy uncertainty in South Africa’s energy market as a key factor impacting on investment decisions. This relates to, for example, uncertainty around the REI4P programme (and Eskom’s delay in approving projects) and policy uncertainty around energy planning. The degree of energy policy uncertainty increased significantly after the stakeholder engagement process was concluded when the current Minister of Energy announced that all official energy planning done in South Africa since 2010 has effectively been set aside, and that the outdated 2010 Integrated Resource Plan (IRP) will determine the future electricity build plan in South Africa – with only the amount of capacity required being adjusted. This effectively locks the country into a very costly generation that does not reflect the steep declines in the cost of renewables, and guarantees higher than required electricity tariffs going forward. From an electricity regulation perspective, issues related to grid access (including net metering) and wheeling (and the lack of NERSA regulations related to these issues), the lack of broadly applied time-of-use tariffs, and the need for ministerial approval for generation licences, have been highlighted as key factors inhibiting wider investment in low carbon activities. The length of time required to enter into agreements with wheeling license holders (of which there currently is only one in South Africa), Eskom and relevant municipalities for wheeling across their network infrastructure was also listed as a barrier to investment. Where mechanisms were found to overcome regulatory uncertainty, like the use of the REI4P to procure renewable energy, large amounts of funding for low carbon investments were forthcoming. Stakeholders believed that regulatory interventions to allow electricity to be wheeled across the grid more easily (to benefit all renewable projects), formalisation of net-metering rules and regulations (to benefit smaller renewable projects), and simplifying the process to issue generation licenses to renewable energy IPPs, could unlock low carbon investments. In addition, stakeholders in the heavy industry raised issues related to the complexity and compliance burden of environmental regulation, such as Environmental Impact Assessments. Other related issues that were identified included lengthy and expensive administrative regulatory processes associated with obtaining permits and licences and securing lease rights. Barriers related to the xx Low carbon finance study (Phase 1 and 2) The World Bank implementation and burden of environmental regulation are complicated as they involve weighing up different policy objectives and are implemented by different levels of government.4. Another common barrier to low carbon investment identified during the literature review (and confirmed during stakeholder consultations) was a lack of technical or legal capacity within government entities, which reduced the likelihood that heavy industrial users could rely on municipalities and other non-national government entities to provide them with renewable energy. A lack of skills with within regulators was also believed to be contributing to regulatory and policy uncertainty, and the compliance burden of environmental regulation. Stakeholders indicated that more certainty about future climate mitigation policy in South Africa is important to unblock the flow of funding to low carbon investments. This is consistent with the results from the literature review, which found that a lack of strong supportive signal from government creates uncertainty about future mitigation policy and hampers future growth and planning. Policy and regulatory uncertainty related to energy policy and planning is reducing low carbon investments. The complexity and compliance burden of environmental regulation was also mentioned as a barrier. Limited public sector technical capacity is exacerbating regulatory and policy barriers. Targeted regulatory reforms in the electricity market can unlock low carbon investment projects, as can strong signals on future climate change mitigation policy. Industrial incentives. Numerous mechanisms are available in South Africa that could support industrial sectors to undertake low carbon investments. The level of awareness of these incentives among heavy industry, however, appears to be comparatively low. Some stakeholders believed this is the case because companies rely too heavily on ESCOs, service providers and/or consultants to make them aware of incentives as opposed to investigating the available incentives themselves. Only three incentive programmes were seriously considered or utilised by companies in heavy industry, and two of these three incentives are not currently particularly useful. The Eskom IDM/DSM programme has been refocused on ESCOs and its future is highly uncertain, whereas low CER prices since the 2008 global financial crisis has reduced the attractiveness of the CDM. Almost all stakeholders considered the 12L energy efficiency tax incentive, but most were not successful in accessing it. Several companies did not apply because of the perceived complexity of the process. It was generally felt that due to high monitoring and verification costs, and other transaction costs, this incentive was only worth applying for in relation to very large investments. 4 Environmental regulation in South Africa is a concurrent function in terms of the Constitution, which means that national government departments, provinces and municipalities all have different roles and responsibilities – and while national government departments can set down norms and standards to guide the consistent implementation of regulations, it cannot directly influence implementation. xxi Low carbon finance study (Phase 1 and 2) The World Bank Despite numerous incentives that can be accessed to support low carbon activities being available, they are not effectively driving investment due to low awareness and the cost and complexity of accessing these incentives being perceived as prohibitive Factors influencing the supply / availability of finance Overall lending and investing environment Assessing low carbon investment options. Stakeholders in the financial sector indicated that low carbon investments are assessed using the same criteria as standard typical investments, namely: technology and regulatory risks; internal rates of return and payback periods; and financial status and market prospects of the implementing company. Thus, the potential wider positive (non-financial) externalities and benefits from low carbon investments are generally not considered when evaluating such private sector opportunities for investment purposes. However, in addition, and specifically for low carbon investments (such as renewable energy), stakeholders in the financial sector indicate that the reputation and track record of the firm supplying the equipment was an important consideration. Since the payback periods for such investments are typically long, financial sector investors want to ensure that the associated risk posed by the continuity of business operations by the project developer is minimised. Investment in low carbon activities is assessed similarly to general investments / projects. As a result, investments that have potentially large (but long-term) wider economy benefits may not be considered for financing. A lack of reputable project implementers and equipment suppliers negatively affects the bankability of projects. The long-term nature of such projects means that the capacity and longevity of project developers/service providers are critical to the investment’s success. Concessional financing is not attractive. Multilateral and South African DFIs have, to varying degrees, provided wholesale and direct financing for green and low-carbon initiatives. However, near consensus feedback from the South African banking sector was that wholesale finance and credit lines provided by donors and DFIs for green and sustainable investment were mostly not attractive. Concessionary wholesale finance was often more expensive than corporate banks’ own funds, particularly where the finance or credit lines were denominated in foreign currency. Financial sector stakeholders indicated that the IFC is in the process of introducing a local currency credit line that could be accessed by corporate banks, and were hopeful that this could make the available funding more attractive. Donor and DFI-provided credit lines and wholesale finance where also viewed as costly to administer, manage and monitor. This stems from due diligence, monitoring and evaluation requirements which are not compatible with the administrative systems and processes of financial institutions. xxii Low carbon finance study (Phase 1 and 2) The World Bank Furthermore, it appears that DFIs and donors are only in the early stages of providing other support mechanisms (beyond concessionary finance) in South Africa to encourage financing of low carbon investments, such as investment guarantee schemes or other credit enhancement mechanisms. These mechanisms may be better received by the South African financial stakeholders given that they focus more explicitly on sharing risk rather than reducing the cost of finance. The literature review highlighted the view that information sharing between funders is currently happening on an informal and ad hoc basis, and that consequently funders are often not aware of opportunities to collaborate with other funders. This is believed to be a problem that hampers co- funding by commercial finance providers and DFIs. On the other end of the scale of investments, the literature review showed that funding for small projects presents additional challenges due to a lack of economies of scale. Small-scale projects suffer from long lead times, and high project preparation and environmental authorisation costs relative to returns. Without concessionary funding, and/or mechanisms to bundle these options together or reduce their transaction costs via a programmatic approach, it is unlikely that many of these projects will qualify for external funding. Donor and DFI-provided concessionary wholesale finance to support low carbon investments are mostly not considered attractive by the South African financial sector due to relatively high costs, high administrative burden, and a lack of sufficient risk reduction. Market factors and investment structuring Cost of finance and payback periods. The literature identified issues related to the lending, bankability and payback periods required by financial institutions as the most common challenges encountered in financing low carbon investments. Banks are risk aversive and typically only lend for 5-7 years while the breakeven point (payback period) for renewable energy is typically around 15-17 years. Of the 51 potential large low carbon investment options discussed with stakeholder, only 13 where expected to have a payback period of less than 6 years Almost all traditional banks consulted identified the extended payback period of low carbon investments as a significant hurdle when deciding whether to finance and invest in such activities. On average, South African corporate banks suggest that they would not consider project-based financing where the payback period extends beyond 5 to 7 years. On-balance sheet lending provided to South Africa’s industrial corporates is typically far shorter. The high level of risk aversion in terms of project payback periods extends to DFIs operating in this space, with these also exhibiting limited appetite to match finance to the generally long payback periods of low carbon investments. For financial entities, the cost of finance is directly related to project and firm specific risk and return factors, and none of the financial sector consultations were able to provide a fixed cost of finance for low carbon investments. However, several stakeholders suggest that project finance for smaller projects is not feasible given the high transaction costs. In addition to the cost of structuring transactions, small-scale projects may suffer from issues experienced in large-scale projects (including long lead times, high project preparation and environmental authorisation costs relative to xxiii Low carbon finance study (Phase 1 and 2) The World Bank returns), reducing the overall profitability of the project. Project costs are therefore often increased due to a lack of economies of scale in procurement. Unsurprising stakeholders believe that smaller low carbon investments and projects (typically those less than R50 million) are financed internally by many of South Africa’s industrial firms. This is especially the case for those low carbon investments where the internal rates of return are high and the upfront cost could be absorbed into the firms’ operating budgets. Long payback periods for many low carbon investments is a key barrier preventing financing. Low carbon investments typically have much longer payback periods than those that the South African financial market finds acceptable. Smaller options are typically financed internally, but high transaction costs relative to project value prevent options that have relatively low returns (compared to operational investments) from receiving external financing. Credibility of clients/off-takers. Most financial institutions mentioned concerns around the credibility of most private sector off-takers given the often very long time frames (10 years or more) involved. Sufficient revenues need to be generated to cover the cost of large, capital intensive projects - which typically requires a long period of stable returns. There are few industries in South Africa that can guarantee this, and the current poor performance of the mining and manufacturing sectors add to their perceived riskiness. This finding is supported by the literature review, which found that because of the long-term nature of large and capital-intensive low carbon investments where returns are closely tied to the operation of a specific plant (like co-generation for example), the prospects of the market in which a company operates is often viewed as more important than the current balance sheet of a borrower. Perceived riskiness of local mining and manufacturing sectors reduce the willingness of financial sector entities to lend to companies in these sectors for the often very long periods required by low carbon investments. ESCOs as a mechanism and instrument for financing. The electricity supply crisis that started in 2007, and the various funding mechanisms mobilised to address it, has led to a greater emphasis on energy efficiency amongst heavy industrial companies. This has led to the identification of a large number of relatively low investment energy efficiency options, which have mostly been financed and implemented internally. Sharply increasing electricity prices since 2007 (and the expectation that this will continue in future), continuing security of supply concerns (now linked to transmission and distribution infrastructure rather than a lack of supply), and steep reductions in the cost of renewable energy, have caused industrial companies to pay more attention to renewable energy as a way to reduce cost and enhance competitiveness. xxiv Low carbon finance study (Phase 1 and 2) The World Bank Various heavy industry stakeholders, however, mentioned a lack of ESCOs and other service providers of sufficient scale in South Africa willing to finance and operate energy efficiency and renewable energy projects as a barrier to low carbon investment. Despite this, stakeholders indicated that while most low carbon investment options have historically been funded internally, going forward the preferred implementation model for low carbon investment will be the use of ESCOs (or other service providers) to implement projects. Reasons for this include to: • Ensure the funding remains off the balance sheet of the heavy industrial companies, • Access skills and expertise that were not core to operating activities, but which could provide significant efficiency improvements, • Share the capital cost and risk of implementing projects through a shared-savings model, and • Shift the burden of accessing relevant incentives and support mechanisms for low carbon initiatives to a third party with more experience in these areas. Changes to accounting regulatory standards may serve to accelerate the perceived role that ESCOs could play as a provider of projects and services, for both the heavy industry and financial sector.5 Numerous industrial stakeholders indicated that they would not be willing to be the sole off-taker to renewable energy projects in future, or enter into PPAs or other long-term contracts where it would be difficult for the suppler to switch to other customers, because of the risk that this would have to be shown as a liability on their balance sheets. The declining attractiveness of these previously off-balance sheet funding arrangements means that the ability to supply multiple customers on a shorter-term basis through alternative mechanisms is becoming increasingly important to the design of larger-scale renewable energy projects. Aggregating low carbon investment projects from companies in different sectors on the balance sheet of well-capitalized ESCOs would also help to address the issue with off-taker credibility discussed above, and could thus serve as an intermediary between companies and the financial sector to access low carbon finance. It is thus not surprising that stakeholders saw support for the ESCO/service provider/project developer market as key to unlocking funding to low carbon investments. A key barrier, however, is the relatively nascent ESCO market. Stakeholders in heavy industry and the finance sector perceive there to be too few reputable ESCOs (based on track records that inspire confidence) of sufficient scale in the South African market, despite the significant opportunities for growth. 5 Previously, firms could distinguish between operating and finance leases (and therefore avoid having to recognize certain liabilities on their balance sheets). The new IFRS 16 accounting standard set to come into effect from January 2019 will require companies to recognize on their balance sheets any agreements that could be classified as leases, and defines leases much more broadly than was previously the case. This accounting standard may significantly alter company’s decision-making when choosing between on-balance sheet funding, project-based financing or the use of external project developers and ESCOs. xxv Low carbon finance study (Phase 1 and 2) The World Bank ESCOs are likely to play an important role as implementers and financiers of low carbon investments in future, and may help to overcome issues related to the credibility of clients/off-takers. However, a lack of reputable ESCOs with sufficient scale is currently acting as a barrier to low carbon investments. Possible interventions A wide range of barriers to low carbon investment was mentioned during the stakeholder consultation process. While the most important barriers were discussed above, 16 categories of barriers were raised by more than one stakeholder, while a further 21 barriers were mentioned by only one stakeholder. This signals that a one-size-fits-all approach is unlikely to be able to support low carbon investments across sectors. It may be possible to develop programmes that effectively support one type of low carbon activity, as the REI4P did very effectively before political economy factors intervened, but a broad instrument that aims to support a range of low carbon activities is unlikely to be successful. Preliminary interventions identified during the study and are presented here to inform further analysis. Policy interventions Understanding the low uptake of available incentives. The large number of available mechanisms that could potentially support low carbon investments in South Africa paints a misleading picture of the actual level of public sector support provided. This justifies a more in-depth assessment of why existing incentives are not been accessed, and how they could be refined, consolidated or replaced to more effectively support low carbon investments. Supporting R&D in low carbon activities. Almost 60% of the low carbon investment options identified as not attractive for funding was classified as such due to technologies or processes not having been proved locally. Unsurprisingly, funding for research, development and innovation was highlighted by stakeholders as important to ensure more low carbon investments materialise. Supporting policy reform. Both the high degree of policy and regulatory uncertainty, and technical capacity related to the administration of regulations and implementation of projects, were identified as key factors inhibiting investment in low carbon activities. There is thus a sound rationale for government to create a conducive climate for renewable energy self-supply, IPPs, wheeling and net metering to enable companies to invest in renewable energy self-supply. At the same time, it will be important to support capacity development initiatives at all spheres of government to alleviate bottlenecks in the administration and regulation of environmental and energy related policies. Interventions targeting finance providers Guarantee schemes. First-loss’ guarantees or other mechanisms to reduce risk were identified by financial sector stakeholders as options to raise their risk appetites and leverage investment in low carbon activities. Mechanisms such as these are starting to emerge in South Africa, but are nowhere near the scale required. They also mostly don’t apply to projects below R50 million. xxvi Low carbon finance study (Phase 1 and 2) The World Bank Green bonds. The utilisation and issuance, of green bonds in South Africa remains relatively low. However, some participants in the financial sector suggest that these instruments could play a vital role in two ways. First, green bonds could be utilised as an effective mechanism to pool / securitise low carbon investments and allow investors to better match their tenor, risk and return criteria across a range of green bond maturities. Second, historically ‘dirty’ (high carbon emitting) firms that continue to have strong balance sheets could potentially access relatively cheap finance for smaller low carbon initiatives by issuing green bonds. The key for this appears to be the ability to verify and ensure that finance provided through green bonds is ring-fenced for ‘green’ activities. Creating investment portfolios Discussions with the financial sector suggested that key to increasing investment in low carbon and green projects was increasing economies of scale and enhancing the ability to match a project’s payback period with the tenor limits imposed by different funders. To achieve this, some corporate banks are exploring the creation of project portfolios that pool these investments and allow for a ‘cookie-cutter’ approach to matching portions of the overall pool with specific investment constraints and criteria. This securitisation and portfolio approach is increasingly seen as a way of reducing overall risk and achieving economies of scale. Related to this, some corporate banks are also exploring different re-financing approaches to try and match their relatively short-term tenor limits with long-term payback periods for low carbon projects. This could include creating investment pools whereby the level of financing, risk and cost can be better segmented and matched to lenders’ requirements, while ensuring that the overall pool is large enough to be attractive to corporate lenders. Interventions targeting the energy market As mentioned above, aggregating low carbon investment projects from companies in different sectors on the balance sheets of well-capitalized ESCOs could address the issue with off-taker credibility, and ESCOs could thus serve as an intermediary between companies and the financial sector to access low carbon finance. Coupled with their ability to combined small low carbon investment options into larger investment programmes that can be undertaken profitably, and the greater demand for ESCOs to enable companies to keep low carbon investments off their balance sheets, this points towards ESCOs being an important conduit for low carbon finance in future. At present, however, there are relatively few sufficiently well-capitalised ESCOs with long track records in South Africa. It may thus be appropriate to use credit enhancements, direct equity injections, or other mechanisms to increase the credit worthiness and deployment capacity of ESCOs operating in South Africa, and to incentivise more companies to enter the market. xxvii Low carbon finance study (Phase 1 and 2) The World Bank Conclusion This executive summary illustrated the complexity surrounding the finance of low carbon investments in heavy industry in South Africa at a time when these sectors are struggling. It has, however, also shown that these sectors remain integral to South Africa’s economic development objectives, and that stakeholders believe that undertaking low carbon investments are vital to their future competitiveness. A combination of falling renewable energy costs, a greater emphasis on energy efficiency, and sharply increasing electricity prices has caused low carbon investments to move from being viewed as an environmental sustainability issue, to being considered strategic long-term investments. Numerous gaps and barriers to the financing of these investments remain, however; and these differ by sector and type of investment. Addressing these gaps and barriers will not be easy, but this executive summary has identified several promising interventions that require further analysis and thought. Should these interventions be successfully implemented, they could have a significant positive impact on both the GHG emissions and development trajectories of heavy industry in South Africa. Given the external drivers at play currently, there arguably has never been a time when support for low carbon investments has been more necessary, or has had a higher change of success, than the present. xxviii Low carbon finance study (Phase 1 and 2) The World Bank 1 BACKGROUND In line with an increased global focus on sustainable development and mitigating climate change, the South African Government has put in place several policies and plans that aim to charter a green growth path for South Africa. The National Development Plan (NDP) advocates for a greener economy and envisions a transition to a low-carbon, resilient economy and a just society (National Planning Commission, 2012). The New Growth Path (NGP) and Industrial Policy Action Plans also incorporate climate mitigation and sustainable growth objectives. The South African government has gazetted a draft carbon tax policy, and legislation is expected to be formally tabled in parliament in 2018. Implementation of the carbon tax is expected in 2019 or shortly thereafter (National Treasury, 2017). From an international perspective, South Africa has also made climate change commitments through the ratified Nationally Determined Contributions (NDCs)6. More information on South Africa’s climate change policy is provided in Appendix 1. The NDP suggests that public sector financing for South Africa’s transition to a low carbon economy will come from a re-alignment budget line items, revenue generated from carbon pricing and international aid. However, it also notes that “using public sources of funding to leverage private investments is critical if adequate resources are to be mobilised” (National Planning Commission, 2012). Similarly, South Africa’s NDC emphasise that “the key challenge for South Africa is to catalyse, at an economy-wide scale, financing of and investment in the transition to a low carbon and climate resilient economy and society” (INDC, 2015). There is a high degree of variance in the estimates of the cost of mitigation activities to achieve South Africa’s desired GHG emissions trajectory. The NDC, for example, provides the cost of different activities that might contribute to the achievement of South Africa’s emissions reduction target, summarised in Table 1. Table 1: South Africa's NDC mitigation activities Activity Estimated cost in NDC Incremental cost to expand Renewable Energy Independent Power Producers US$ 3 billion (R 39 billion) per year Procurement Programme (REI4P) Decarbonised electricity by 2050 US$ 349 billion (R 4,537 billion) between 2010 and 2050 Carbon capture and storage (23 Mt from US$ 0.45 billion (R 5.85 billion) coal-to-liquid plant) Electric vehicles US$ 513 billion (R6,669 billion) between 2010 and 2050 Hybrid electric vehicles (20% by 2030) US$ 488 billion (R6,344 billion) Source: (INDC, 2015) The NDC only provides high level estimates for a narrow range of possible mitigation activities. Nevertheless, what this clearly illustrates is that the transition to a low carbon economy cannot be financed by the public sector alone. Hence, it is necessary to both leverage public sector investment 6 Following on from the 2015 Paris Agreement, each signatory to this agreement agreed to prepare and submit intended NDCs (INDCs) outlining each party’s mitigation objectives and targets. South Africa submitted its INDC in 2015. Following ratification of the INDC, this became South Africa’s NDC in 2016. 1 Low carbon finance study (Phase 1 and 2) The World Bank to draw in private sector financing, and to effectively incentivise the private sector to undertake large- scale investment in low carbon activities. This is especially true where such investments may have uncertain returns, long lead (or payback) times, or where the risk of such investments failing is high. 2 OBJECTIVES AND APPROACH This working paper aims to identify barriers to private sector finance for low carbon activities in priority South African industrial sectors. It does so by considering both the demand and supply of finance for low carbon investment, and identifying gaps in and barriers to financing low carbon investments in South Africa. Box 1 Definition of low carbon activities For the purposes of this working paper, low carbon activities are considered as any activity that reduces the greenhouse gas (GHG) emissions from a company, or reduces the carbon intensity of a company over time (i.e. reduces the amount of GHG emissions per unit of output of the company – including indirect emissions from electricity use). Specific types of low carbon investments include, but are not limited to: • Energy efficiency (reducing the amount of electricity, goal, gas, or other fuel used) • Fuel switches to low carbon fuels • Process changes and optimisation • Lower carbon energy generation • New plant and equipment • Alternative inputs and feedstocks • Monitoring, reporting and control systems • Production pathway shifts and new technologies The insights relating to the barriers to private sector finance will inform future World Bank research considering international experience on additional/complementary approaches to improve the efficiency and effectiveness of using public funds to leverage private finance. Insights from both research pieces will inform interventions for leveraging public resources to catalyze private sector finance to support low carbon investments in South Africa. The wider World Bank project aims to: • Explore approaches to stimulate energy efficiency and low carbon investments in South Africa’s industrial base; • mobilize private sector finance to support industrial growth within the context of the country’s sustainable development strategy; and • mitigate potential competitiveness impacts to sectors of national importance to South Africa’s economy due to low carbon policies. Key documents were identified and compiled into a knowledge database of literary sources that provided information on low carbon financing in South Africa. From this knowledge database barriers 2 Low carbon finance study (Phase 1 and 2) The World Bank to low carbon investment and financing were identified. Appendix 4 provides a summary of the sources and the identified carbon investment and finance barriers. The study also included stakeholder consultation in the form of both one-on-one interviews and focus group sessions. Thematic analysis was used to analyse additional factors which stakeholders indicated influence the ability to implement and/or finance specific types of mitigation options. Where possible, information from interviews where confirmed and expanded upon during the focus group discussions. For some sectors, however, the results were based on general literature, the Mitigation Potential Analysis (MPA) (DEA, 2014) and an interview with a sector representative. The study considered both the supply and demand for low carbon financing. This included an analysis of available low carbon finance options, and interrogated whether there are certain characteristics that make low carbon investments (i.e. energy efficiency, renewable energy self- supply, or other measures/technologies) easier or harder to finance. These characteristics were considered from the perspective of the entities trying to obtain finance for low carbon investments (companies in the focus sectors), and the entities that finance these investments (the financial sector). The research endeavoured to go beyond general issues believed to drive or constrain the provision of low carbon finance, and focus on the specific issues that drive the decision to seek and to provide financing for low carbon investments within actual South African industrial sectors. Initially the focus of the study was on raising external financing for low carbon activities, but during the study it was decided to also consider factors that will assist with unblocking corporate finance options and/or allow smaller options to be financed. This working paper proceeds by providing an overview of heavy industry in South Africa, and then considers the energy and GHG emissions profiles of the relevant sectors. Section 0 considers the financing of low carbon investments in South Africa, while Section 6 lists the low carbon investment options identified per sector. Section 7 outlines the drivers, gaps and barriers to low carbon finance identified, and Section 8 summarises possible interventions to support the finance of low carbon investments based on stakeholder feedback and the literature review. The working paper then concludes in Section 9. Several appendices provide further context and information, including the results of the literature review and stakeholder engagement. 3 Low carbon finance study (Phase 1 and 2) The World Bank Box 2 Identification and assessment of low carbon activities The mitigation options presented in the Department of Environmental Affairs’ (DEA’s) MPA served as a point-of-reference to facilitate stakeholder consultations on low carbon investment opportunities and challenges (DEA, 2014). It provided examples of practical interventions that companies could undertake. The analysis was not restricted to MPA options, however, and these activities were supplemented by low carbon activities identified from the open literature and raised during the stakeholder consultation process. The characteristics of all low carbon investment options were interrogated as part of the stakeholder engagement. Three criteria were used to assess the attractiveness of low carbon investment options, and were updated based on stakeholder input: • Implementability in South Africa. This criterion considers whether an option can reasonably be implemented locally at present without any further development. Consisting of two components, which provide an indication of the feasibility to implement, from “Technical” and “Institutional” perspective. The former is defined as “[t]he extent of difficulty in implementing the measure, taking the availability of technology and the extent of development of the field in SA into consideration”, and the latter as “[t]he extent to which implementing the measure requires engagement and approval of multiple public bodies and involves multiple regulations.” (DEA, 2014). For options that were not covered in the MPA the extent to which the technology had been deployed internationally and in South Africa was used to assess implementability. • Investment cost. Given that entities within the heavy industrial sector in South Africa tend to be relatively large, and are often part of multinational groups, external finance was considered attractive only for investments of R50 million or larger.7 Investment costs were obtained from the MPA or the open literature. Additional options costing less than R50 million, however, could become more attractive for external financing if mechanisms for funding and implanting them jointly was developed, and recommendations in this area were considered. • Operational cost or return. A final measure to consider the attractiveness of low carbon investment options is their operational impact, namely the length of expected payback period (for investment options that generate positive returns) and the Rand cost to abate a tonne of CO2e (for net cost options).8. 7 There was a broad consensus amongst stakeholders that this cut-off is appropriate. Where stakeholders indicated that they would consider external finance for smaller options, this was noted in the body of the report and these options were recorded as potentially financeable options. 8 Value were calculated using MPA data or obtained from literature or stakeholders. The Rand cost per tonne of CO2 abated e based on MPA data was calculated as a NPV of costs assuming a 6% inflation rate. 4 Low carbon finance study (Phase 1 and 2) The World Bank 3 THE HEAVY INDUSTRY SECTOR IN SOUTH AFRICA This section provides an overview of the sectors covered by the study, and describes the context within which they operate. It starts by listing the focus sectors, and then discusses the importance of South Africa’s industrial base. Since all the focus sectors fall within the broader areas of manufacturing and mining, a short overview of general investment trends in these areas is provided. Detailed reviews of the state of the individual ‘heavy industry’ sectors are provided in Section 3.4. The sector reviews include an assessment of production, output and capacity utilisation trends, as well as trade dynamics, key role players and (where available) a discussion of the outlook of each sector. Box 3: Challenges and implications low-carbon development policies on heavy industry The internationally agreed climate targets set under the UNFCCC require collective action and will not be met without action in all major emitting countries and across a range of economic sectors. The South African Draft Carbon Tax Policy Bill outlines the proposed carbon tax design along with various revenue recycling options which aim to reduce greenhouse gas emissions and facilitate the transition to a green economy. One of the concerns related to a carbon tax, however, is carbon leakage – which refers to the relocation of industries or productive capacity to jurisdictions with no or lower carbon prices. There are several channels through which carbon leakage can arise which include (Ward, et al., 2015; Marcu, et al., 2013): • production/output leakage due to differences in cost structure between GHG activities in constrained and unconstrained GHG jurisdictions (impact on short term competitiveness) • Investment leakage due to carbon emission costs reducing investment in covered firms. In the long-run covered firms may close or new plants may be preferentially located in jurisdictions with less stringent regulation. • fossil fuel price channel or energy channel where abatement of GHG emissions leads to a reduction in the demand for carbon-rich fossil fuels and a subsequent fall in prices therefore increasing the global demand for these fuels in jurisdictions with less stringent regulations\ and possibly overall emissions. The consequences of reduced international competitiveness and shifts in economic activity are problematic for a developing country like South Africa already being characterised by high levels of poverty and unemployment rates (Cloete & Robb, 2010). Environmental impacts of carbon leakage could lead to a net increase in global emissions, thereby defying the original intent of carbon pricing. Competitiveness concerns arising through carbon leakage tend to also be concentrated in upstream sectors, and particularly in sub- sectors that utilize energy and emissions-intensive processes to produce low value- added products. These sectors are currently core to South Africa’s international competitiveness and currently constitute a large part of the economy. Reduced international competitiveness may lead to a contraction of sectors and a reduction in employment, tax revenues, investment and economic growth (Demailly, 2008); (Neuhoff, 2008). Ex post evidence of carbon leakage has been limited. However, historical carbon prices have been relatively unambitious, relatively few ex post studies have been undertaken, and most employed questionable methodologies (Aichele & Felbermayr, 2015; Ward, et al., 2015; Branger, et al., 2016). Coupled with concerns expressed by industry, the very high potential carbon leakage risk identified by many ex ante studies, and the political economy of lobbying, this led Ward et al. (2015) to conclude that carbon leakage will remain an important consideration going forward. 5 Low carbon finance study (Phase 1 and 2) The World Bank 3.1 Focus sectors The term ‘heavy industry’ is not commonly used in South Africa, and consequently the choice of sectors to include in the study was made in consultation with the World Bank and Business Unity South Africa (BUSA), and confirmed at a meeting between the World Bank, National Treasury and other South African national government stakeholders. The importance of sectors from a climate change mitigation perspective informed selection, which resulted in a sector like Pulp and Paper, which is not typically considered heavy industry, being included as focus sector. The following sectors are covered by the study: Coal Mining; Mining of Precious metals (Platinum Group Metals and Gold); Other Mining (focusing on Manganese and Iron Ore); Chemicals; Petroleum Products; Non-metallic Mineral Products (focusing on Cement); Iron and Steel (including Ferrous Alloys); Non-ferrous Metals (focusing on Aluminium); Glass; and Paper and Pulp. More detail on the coverage of each sector is provided below and in Appendix 2. 3.2 The importance of South Africa’s industrial base to its economy South Africa’s industrial base has historically been the cornerstone of the economy, with strong linkages between South Africa’s mining sector and both the manufacturing and services sectors. However, the contribution of the mining and manufacturing sectors to economic output have experienced a long-term decline. This is illustrated in Figure 3. Prior to South Africa’s first free elections in 1994, the mining and manufacturing sectors contributed a combined 31% to South Africa’s gross domestic product (GDP). This contribution to GDP has fallen to less than 22% by the end of 2016. Figure 3: Mining and manufacturing contribution to real GDP 35% 30% 25% 15.2% 20% 15.5% 15% 13.6% 10% 15.9% 5% 9.8% 8.0% 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mining Manufacturing Source: Authors, based on data from Statistics South Africa The mining sector has seen a substantial decline in terms of its overall contribution to GDP – almost halving between 1993 and 2016. This trend was prevalent throughout the 2000s, despite the global boom in commodity prices. 6 Low carbon finance study (Phase 1 and 2) The World Bank For the manufacturing sector, on the other hand, the falling contribution of the sector accelerated after the 2007/8 global financial crisis. In 2007, the manufacturing sector’s contribution to GDP was higher than in 1993, but has fallen significantly since then. South Africa’s mining sector has seen volatile performance in the period after the 2008 global financial crisis. Beyond 2009, each year of growth has been followed by a year of real decline. This is reflected in Figure 4. Since the 2007/8 global financial crisis, South Africa’s industrial base has largely underperformed the growth of other sectors, and especially that of services. This is especially notable for the period between 2013 and 2016, where average growth of both the mining and manufacturing sectors is well below that of overall GDP. Figure 4: Real GDP growth since 2007 10% 8% 6% 4% 2% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -2% -4% -6% -8% -10% Total GDP Mining Manufacturing Source: Authors, based on data from Statistics South Africa From an employment perspective, a similar downward trend is noticeable for both the mining and manufacturing sectors. Figure 5 highlights that private sector employment in both the mining and manufacturing sectors has shrunk between 1993 and 2016. Private sector employment in 2016 for these two sectors is more than 25% lower than 1993. 7 Low carbon finance study (Phase 1 and 2) The World Bank Figure 5: Private sector employment (Index, 2010 = 100) 140 120 100 80 60 40 20 0 Mining Manufacturing Source: Authors, based on data from South African Reserve Bank The mining sector appeared to arrest this long term downward trend during the commodity boom in the 2000s, but given significant policy uncertainty in the sector and a slowdown in investment, this trend may re-emerge. Private sector employment in the mining sector increased from 2001 and peaked in 2012. However, after 2012 the mining sector has been shedding of jobs. Figure 6: Share of total formal sector employment (excluding agriculture) 18% 16% 16% 14% 12% 12% 10% 8% 6% 6% 5% 4% 2% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mining Manufacturing Source: Authors, based on Statistics South Africa Quarterly Employment Survey As seen in Figure 6, the shedding of jobs in the manufacturing and mining sectors has seen the share of formal employment in these sectors falling between 2007 and 2016. Combined, the share 8 Low carbon finance study (Phase 1 and 2) The World Bank of formal employment in the mining and manufacturing sectors has fallen from 22% in 2007 to 17% in 2016. The high-level analysis of South Africa’s industrial sectors (mining and manufacturing) reflects a long- term trend of deindustrialisation. This trend is constant since 1993, and continued even during South Africa’s strong growth years in the early and mid-2000s. However, this trend appears to have accelerated after the 2007/8 financial crisis. Following a brief recovery post-2008, the downward trend in terms of economic activity and employment in South Africa’s industrial sectors accelerated from about 2013. South Africa has developed several high-level policies and plans in an attempt to arrest the long- term deindustrialisation of the economy. The NDP, the NGP and the Industrial Policy Action Plans (IPAPs) have advocated for the support of the mining and manufacturing sectors. The rationale for this has been, in part, based on the view that these sectors are relatively more labour-intensive and, through focused support, can effectively address South Africa’s high levels of (especially unskilled) unemployment. South Africa’s policies are elaborated on below, particularly in terms of their relation to South Africa’s climate change policy. The policy actions reinforce the country’s commitment to building a climate-resilient, equitable and competitive lower-carbon economy and society. These objectives aim to simultaneously address South Africa’s over-arching national priorities for sustainable development, job creation, improved public and environmental health, poverty eradication, and social equality (RSA Government, 2011). 3.3 Mining and manufacturing investment trends Figure 7 shows the annual real gross fixed capital formation (GFCF)9 (investment) for South Africa between 1994 and 2016. The general upward trend over this period has been marked by periods of both strong annual growth in investment and periods of declining real investment. The early to mid- 2000s was a period of especially strong real investment in South Africa, prior to the 2008 global financial crisis. For a short period post-2008, real investment flows grew, before declining again from 2014/15. 9 GFCF reflects the total investment flows in a sector, before considering the “consumption” of fixed capital (depreciation). In national accounting terms, GFCF therefore reflects new investment flows but does not consider the effects of depreciation on existing capital investment. A small positive GFCF number could thus easily coincide with disinvestment in a sector if investment is not sufficient to cover depreciation. 9 Low carbon finance study (Phase 1 and 2) The World Bank Figure 7: Real GFCF (investment) in South Africa (2010 constant prices) Total annual GFCF (R billion) Annual growth in GFCF 700 30% 25% 600 20% 500 15% 10% R billions 400 5% 300 0% 200 -5% -10% 100 -15% 0 -20% Government Public corporations Private sector Public sector Private sector Source: Authors, based on data from Statistics South Africa The “Public sector” series in the second graph combines government and public corporations. While the private sector has remained the dominant source of investment, this dominance has waned. The share of private sector investment (as a percentage of total investment) has fallen from a peak of 75% in 2005 to less than 62% in 2016. This is a result of both strong increases in public sector investment over this period and declining annual growth in investment by the private sector. Private sector investment fell sharply immediately after 2008 and has again experienced a downward trend since 2013. Figure 8 shows investment by economic activity between 1994 and 2016. Sectoral investment has fluctuated over this period, with the share of total investment in the financial and business services sector increasing from 31% to 34% between 1994 and 2005, before declining to 20% in 2016. Investment in the transport, storage and communication sector has increased from 9% of total investment in 1994 to 17% in 2016. Combined, however, investment in the services sectors (finance, business, utilities, construction, government and community services) has increased from 62% of total investment in 1994 to 75% in 2016. 10 Low carbon finance study (Phase 1 and 2) The World Bank Figure 8: Real GFCF (investment) in South Africa (2010 constant prices), by economic activity 100% 15% 16% 90% 22% 80% 70% 31% 20% 34% 60% 50% 9% 17% 14% 40% 7% 6% 16% 30% 22% 20% 21% 13% 10% 10% 6% 10% 6% 3% 2% 0% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Agriculture Mining Manufacturing Construction and utilities Transport, storage, communication Finance, business, trade services Govt and community services Source: Based on data from Statistics South Africa The “Public sector” series in the second graph combines government and public corporations. By contrast, investment in South Africa’s industrial base largely mirrors the economic performance of these sectors. Figure 9 shows the share of investment in mining and manufacturing since 1994, and the annual growth in investment flows to these sectors. Combined, investment in mining and manufacturing made up more than 30% of total investment in South Africa in 1994. This has fallen to less than 23% in 2016. A clear long-term downward trend in manufacturing’s share of annual investment is prevalent between 1994 and 2016, with this accelerating just after 2008. For the mining sector, the sector’s share of total annual investment fell just prior to 2008, before recovering and trending downward again after 2011. This is also highlighted when looking at the annual growth in investment in these sectors. Both sectors saw sharp declines in annual investment growth after 2008. Short recoveries in investment growth have subsequently been followed by downward trends, with both the manufacturing and mining sectors seeing negative annual growth in investment after 2013/14. 11 Low carbon finance study (Phase 1 and 2) The World Bank Figure 9: Real GFCF (investment) in mining and manufacturing (2010 constant prices) Sector share in total annual GFCF Annual growth in GFCF by sector 26% 50% 45% 24% 40% 22% 35% 20% 30% 18% 25% 20% 16% 15% 14% 10% 12% 5% 0% 10% -5% 8% -10% 6% -15% 4% -20% -25% 2% -30% 0% -35% Mining Manufacturing Mining Manufacturing Source: Authors, based on data from South African Reserve Bank Annual changes in the real capital stock for these sectors paint a possibly more accurate picture of the ‘net investment’10 in South Africa’s mining and manufacturing sectors. This is summarised in Figure 10. The manufacturing sector saw increasing growth in the sector’s capital stock between 2004 and 2008. However, after 2008, capital stock in the manufacturing sector has shrunk in every subsequent year. By 2016, available capital stock in the manufacturing sector was 13% less than capital stock in 2008. Figure 10 also highlights an accelerated decline in capital stocks from 2012. 10 As noted previously, the GFCF reflects gross investment flows, prior to taking into account the effects of depreciation (consumption of fixed capital). Changes in the capital stock provide an assessment of the net investment flows after depreciation. 12 Low carbon finance study (Phase 1 and 2) The World Bank Figure 10: Real fixed capital stock by sector (constant 2010 prices) Capital stock – R billions Annual change in fixed capital stock 800 7% 6% 700 5% 600 4% R billions 500 3% 400 2% 1% 300 0% 200 -1% 100 -2% 0 -3% Mining Manufacturing Mining Manufacturing Source: Authors, based on data from South African Reserve Bank For the mining sector, real capital stocks have continued to increase beyond the 2008 global financial crisis. However, Figure 10 reveals that the rate of growth in the mining sector has decreased substantially. Growth has declined from a peak of just under 7% in 2008 to less than 3% in 2016. Investment in the mining and manufacturing sectors has mirrored economic activity somewhat. Both sectors saw strong increases in gross and net investment prior to 2008. However, after 2008, investment in the manufacturing sector has fallen, with some evidence that has been disinvestment in this sector (based on shrinking capital stocks). For the mining sector, the rate of growth of investment has declined since 2008. For both sectors there is evidence of these trends accelerating from around 2013/14. Growing policy uncertainty linked to the publishing of the latest Broad-based Black Socio-economic Empowerment Charter for the South African Mining and Minerals Industry in June 2017, however, has seen investment in the mining sector grind to a halt. The clear declining trend in investment in both the manufacturing and mining sectors has important implications for both sectoral growth and employment. More specifically, the ability of firms to implement low carbon projects is likely to be significantly impeded by declining overall investment and a finance constrained climate. The investment trends in manufacturing and mining are also consistent with the ‘investment strike’ narrative identified in stakeholder consultations and the sectoral review. This suggests that improving the policy environment and ensuring greater regulatory certainty may be significant drivers in increasing low carbon investment. 13 Low carbon finance study (Phase 1 and 2) The World Bank 3.4 Performance of individual heavy industry sectors This section provides a sector-level overview for each of the heavy industry sectors identified in this study, within the context of data issues and constraints summarised in Box 4. Where the data is highly aggregated and may not substantially represent the identified heavy industry sector, further analysis is undertaken (where data is available) to better identify market dynamics and trends. Box 4: Issues of aggregation and concordance in industry data The level of aggregation of South Africa’s official production, output and market data does not always match the ‘heavy industry’ sectors identified for the purposes of this study’s analysis and in terms of the grouping of mitigation options by sector. As a result, the production, consumption and trade statistics for each identified heavy industry sector may not exactly match the sub-sector considered as part of this study. A summary of the level of aggregation, and the concordance between South Africa’s Standard Industrial Classification (SIC) nomenclature, trade data classification system and the heavy industries identified in this study is provided in Appendix 2. 3.4.1 Mining Box 5: Disruptions in the mining industry In addition to the broad challenges facing South African industry (for example electricity price and supply issues) over the last decade, the South African mining sector has experienced sector-specific turbulence and policy uncertainty. The outlook for the mining sector is highly dependent on a stable political environment, compliance with environmental legislation and stable labour relations to ensure growth and investment (Kilian, 2017). The mining industry has been negatively affected by labour unrest and policy uncertainty. Labour unrest has been a prominent recent feature of the mining sector, particularly in the platinum industry. During 2014, platinum mine workers held one of the longest strikes in the history of democratic South Africa, lasting five months (SA History Online, 2014). Policy uncertainty has also had an impact on capital expenditure within the sector. There has been a five- year wait for amendments to the Mineral and Petroleum Development Act of 2002, which governs the countries mineral rights. This uncertainty has been exacerbated by the prolonged gazetting and finalisation of an updated Broad-based Black Socio-economic Empowerment delays to the finalisation of the South African Mining and Minerals Industry (Mining Charter) by the Department of Mineral Resources (DMR). The most recent version of this policy document was gazetted in June 2017. The new Mining Charter requires that mines increase their black ownership target to 30%, with this ownership to be maintained in perpetuity. It also requires mining rights holders to pay 1% of their turnover to their black shareholders in addition to dividends, and that 8% of these black empowerment shares be held on behalf of communities in the new Mining Transformation & Development Agency. This agency will also receive 2% of mining companies’ payroll as part of a 5% payroll levy earmarked for skills development. Many of the requirements within the new mining charter are considered onerous and unworkable by the mining industry, and could have significant implications for future investment in the sector. Given this, the South African Chamber of Mines has moved to legally challenge the updated Mining Charter, resulting in a significant policy uncertainty in the sector. 14 Low carbon finance study (Phase 1 and 2) The World Bank A range of commodities make up the South African mining sector. The contributors to total mining GDP include coal (25%), gold (16%), platinum-group metals (PGMs) (22%), other mining and quarrying (13%) and other metal ores (24%). While historically gold was South Africa’s primary mining commodity, it is worth noting that, since 2015, gold contribution to GDP dropped by 7% and PGM’s increased by 11%. (Chamber of Mines, 2016). While a range of broad macroeconomic (and policy) factors impact on all heavy industry sectors, the mining sector has seen specific issues impact on its output and outlook in South Africa. These issues are summarised in Box 5. The following sections discuss and analyse, in greater detail, some of the prominent commodities in South Africa’s mining sector. 3.4.1.1 Coal Figure 11 provides a summary of the coal market. Total production amounted to roughly R114 billion in 2014, with more than half of this amount exported. The domestic market is served almost entirely by local production, with imports accounting for less than 1% of the domestic market. Figure 11: Coal market summary (R billion, 2014) Mining of coal and lignite- production and consumption Exports, 63.58 Local production, 50.65 Domestic consumption; 51.07 Imports, 0.42 Source: DNA Economics based on data from Statistics South Africa Figure 12 demonstrates how coal production remained relatively stable over the 2008 - 2016 period. There was a slight decline in production over the 2008 to 2009 period which could be attributed to the global slowdown following the financial crisis. Production recovered somewhat in 2010 but experienced an initial decline of 3% in 2011 before recovering by 5% between 2012 and 2014. This was consequently followed by a decline in coal production, dropping by 4% in 2015 and remaining stable in 2016. These year on year decreases are in line with the global production trends; the country’s coal production decreased by 3.6% year-on-year in 2015, compared with the 4% year-on- year decrease in global production (de Bruyn, 2016). 15 Low carbon finance study (Phase 1 and 2) The World Bank Figure 12: Coal production (Index, 2010 = 100) 110 100 90 80 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: DNA Economics based on data from Statistics South Africa Figure 13 provides the Rand value of South Africa’s coal exports and imports. South Africa’s coal exports, in Rand terms, have increased substantially, with the value of exports more than doubling between 2007 and 2011. However, subsequent to this, exports have only increased marginally. Exports in 2016 amounted to R57 billion, largely equivalent to the exported value in 2012. This appears to be in line with South Africa’s production trend highlighted previously in Figure 12. Imports of coal, by comparison with South Africa’s exports, are negligible, increasing from R1.4 billion in 2007 to R2.9 billion in 2016. Figure 13: South Africa’s coal exports and imports (R million) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap 16 Low carbon finance study (Phase 1 and 2) The World Bank According to Solomons (2017b), the key export markets in 2016 were the Far East (69%) (with India being the largest importer from this region accounting for 55% of these exports, followed by Pakistan (7%)), Europe (11%), the rest of Africa (10%), Middle East (10%) and North America (2%). It has also been noted that South African coal exports are facing increasing competition form Colombian coal exports which is, on average, more competitively priced than, and at similar quality to, South African coal (Solomons, 2017b). Market dynamics and key developments Table 2 presents an estimate of the 2016 production of the main coal producers, and their indicative market share. Most coal in South Africa is produced by a few large coal producers, with five producers estimated to account for close to 80% of coal production in 2016. There are, however, also smaller and developing coal producers that are making a growing contribution to coal output (de Bruyn, 2016). Table 2: Coal Production and Market Share, 2016 Indicative Market Share (%) 2016 Production [Mtpa] Anglo American 21% 53.8 South 32 13% 31. 7 Glencore 12% 29.3 Sasol 16% 40.3 Exxaro 17% 42.8 Other smaller producers 21% 54.2 Source: DNA Economics based on information from company annual reports. The coal market in South Africa has recently seen an expansion in production capacity by some coal producers. Some large local companies, including Exxaro, have made significant investments in coal for both the domestic and export market. The Belfast mine is scheduled to be commissioned in 2019 to eventually deliver 2.7 Mtpa of thermal coal and the Thabaetsi mine will supply 3.9 Mtpa of thermal coal, with first production expected in 2020. Exxaro has also implemented life of mine optimisation and extension projects to honour their supply commitments to Eskom for the next 30-40 years. Exxaro is therefore projected to become the largest producer of coal over the next two years as Anglo begins to scale back on its involvement in coal production (Solomons, 2017b). Other companies such as Ichor Coal also increased their production capacity in 2016, despite a reduction in coal sales. Sasol established three new mines to replenish 60% of its mining’ division’s operating capacity to supply its Coal-to-Liquid (CTL) facility in Secunda by 2020. These projects potentially extend the lifespan of their CTL-related integrated value chain to 2050. The Impumelelo mine will eventually reach its full production capacity of 10.5-million tonnes of coal by 2019 (Zhuwakinyu, 2016). Coal of Africa also have two coal exploration and development projects namely Makhado (expected to commence production in 2020) and Great Soutspan. 17 Low carbon finance study (Phase 1 and 2) The World Bank The expansion by some producers has, however, been tempered by mine closures and the signalling of curtailed investment by some of the larger producers. These include South 32’s Khutala mine closing in 2016 (South 32, 2016) and the Vaalkrantz Colliery (Keaton Energy) being placed on care and maintenance in May 2016. Coal of Africa’s Vele and Mooiplaats Colliery also remains on care and maintenance since September 2013 due to outstanding regulatory approvals and unattractive coal prices. Anglo American (which is currently the largest coal producer in the country) has expressed intentions to exit its coal and iron ore interests in South Africa. They have put up their coal assets for sale, deeming it to be the right time to sell given the increasing competitiveness of renewable energy (PwC, 2016). South 32 stated that it would not consider investing in new coal projects as investors were increasingly wanting to limit their exposure to coal in favour of cleaner energy sources and renewable energy (South 32, 2016). Drivers, challenges and industry prospects Demand for coal is driven by both local and global factors, with its use in energy generation one of the commodity’s main demand drivers. Coal remains a key contributor to global energy supply and is expected to remain an important source in the near future, particularly in emerging markets. China remains the biggest consumer of coal and developments within China have a significant impact on the global coal market (de Bruyn, 2017). However, local and global factors make the future demand trajectory for coal somewhat uncertain, and at times contradictory. Locally, as noted by Kane-Berman (2017), investment in the South African coal sector is lower than expected. This can be attributed, in addition to the mining sector issues identified previously, to government’s proposal to control the price of coal supplied to Eskom; shifts in government preferences towards nuclear energy and lastly, the fact that Eskom now requires coal suppliers to have at least 51% black economic empowerment (BEE) shareholding. While there is an increasing likelihood that South Africa will diversify its energy mix, with renewables, nuclear energy and gas playing a greater role in the future, unions have not reacted well to Eskom’s proposal to close five coal fired power plants in favour of additional renewables capacity (de Bruyn, 2017). The Department of Energy (DoE) has also released the long-awaited draft of the updated Integrated Resources Plan base case for public comment. The document outlines that 15 000 MW of new coal-fired generation capacity will be added to the national grid by 2050. Some producers, therefore, don’t foresee the energy mix in South Africa substantially moving away from coal powered generation in the short- to medium-term, but do envision international commitments, such as the Paris Agreement to have a long-term impact on the market for coal. Globally, the sector is currently facing a lack of investment in new coal mines because of the global oversupply and low price (de Bruyn, 2016). Internationally, technological advances have also resulted in greater use of shale gas and renewable sources of energy generation, such as wind and solar. This has led to coal’s share of global primary energy consumption falling to 29.2% in 2015, its lowest level since 2005. 18 Low carbon finance study (Phase 1 and 2) The World Bank The uncertain long-term prospects for coal is reflected by developments in India where a sharp decrease in the price of solar energy in India has led to the cancellation of 14 gigawatts of planned coal-fired electricity generation capacity in India (Johnston, 2017; Upadhyay & Singh, 2017; Buckley, 2017). There is agreement amongst commodity analysts that coal use has peaked globally, with major coal users, including China and India, gradually decreasing demand for coal, because of a desire to decarbonise energy supply (Solomons, 2017a). 3.4.1.2 Precious metals (Platinum Group Metals (PGMs) and Gold) Figure 14 illustrates the combined market for gold, PGMs and other mining products.11 Precious metals include gold and PGMs. PGMs include platinum, osmium, iridium, ruthenium, rhodium and palladium. The precious metals and metal ores sector is largely export oriented, as reflected in Figure 14, with more than 80% of production destined for export markets in 2014. Imports, by comparison, is very small and makes up roughly 6% of domestic consumption. Figure 14: Gold, uranium and metal ores market summary (R billion, 2014) Mining of gold, uranium and metal ores- production and consumption Exports, 273.39 Local production, 64.24 Domestic consumption; 68.12 Imports, 3.88 Source: DNA Economics based on data from Statistics South Africa Figure 15 highlights the downward trend in production for Gold and PGMs. Having recovered from production levels experienced during the 2008 - 2009 financial crisis electricity shortages and load-shedding significantly hampered PGM production from 2008 to 2012. Notable production shocks were also experienced in 2012 and 2014, when production of PGMs declined by 12% and 26% respectively. The first shock is related to the Marikana (labour) strike and the second the Association of Mineworkers and Construction Union (AMCU) platinum (labour) strike (Petterson, 2014). 11 Other mining, included in this analysis, includes products such as chrome, copper and manganese. No disaggregated market summary data is available for these “other mining” commodities. However, an analysis of the production and trade trends for these other mining commodities is provided in section 3.4.1.3. 19 Low carbon finance study (Phase 1 and 2) The World Bank These factors, along with safety stoppages ordered by the DMR and an uncertain regulatory environment, have further exacerbated production challenges. However, a significant recovery in production levels was experienced in 2015 when production rose by 30% before subsequently dipping slightly in 2016. Gold production has experienced a steady downward trend since 2008, as also demonstrated in Figure 15. Overall, production levels experienced a decline of 37% over the 2008 - 2016 production period. The largest decline in gold production was experienced in 2012 when production levels dropped by 13% compared to the previous year. Production levels recovered slightly (by 3%) in 2013 but was the only year that experienced positive production growth since 2008. In addition to the broad mining sector challenges previously identified, there is a long-term downward trend in gold production. It is estimated that since 1980 South Africa’s gold production has fallen by 85% (Zhuwakinyu, 2017b). Figure 15: PGMs and gold production (Index, 2010 = 100) 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 PGMs Gold Source: DNA Economics based on data from Statistics South Africa Figure 16 summarises South Africa’s trade in PGMs. South Africa is almost exclusively an exporter of PGMs, with imports of PGMs being trivial. Since 2007, the value of PGM exports have been somewhat cyclical, seeing both upswings and downswings over this period. Overall, PGM exports increased from just under R70 billion in 2007 to just below R90 billion in 2016. 20 Low carbon finance study (Phase 1 and 2) The World Bank Figure 16: South Africa’s PGM exports and imports (R million) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap Figure 17 summarises South Africa’s trade in Gold. The value of South Africa’s gold exports increased substantially between 2007 and 2011, largely because of the recovery in the gold price. After 2011, gold exports have seen a declining trend (in value terms), reflecting both a decline in South Africa’s gold output (as summarised in Figure 15) and a fall in the Rand gold price. Similar to PGMs, South Africa’s imports of gold are negligible.12 Figure 17: South Africa’s gold exports and imports (R million) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports 12The high value of imports in 2007 and 2008 are likely a mis-classification of gold imported from neighbouring and regional countries for refining purposes. For more on classification issues in these years see SARS media release (SARS, 2009). 21 Low carbon finance study (Phase 1 and 2) The World Bank Source: DNA Economics based on data from Department of Trade and Industry (DTI) Market dynamics and key developments Anglo American Platinum is the biggest platinum miner in the world. New players in the platinum industry include Sibanye, which listed in 2013 and is now the largest gold producer in South Africa and a growing force in the PGM industry (Kane-Berman, 2017). Table 3 provides an indication of the key market players in the South African gold mining industry. Other smaller producers include Central Rand Gold, Vantage Goldfields, Barrick Gold. Table 3: Gold Production and Market Share 2016 Data Indicative Market Share (%) 2016 Production [Mtpa] Sibanye Gold 30% 42.9 Harmony Gold 20% 28.6 Anglo Ashanti 19% 27.4 Goldfields 6% 8.2 PAN African Resources 4% 5.8 DRD Gold 3% 4.1 Other smaller producers 17% 124.4 Source: DNA Economics based on information from company annual reports. The PGM and Gold mining sector is characterised by declining production, the diversification away from South Africa by existing players, and consolidation in the market. In terms of production, output declines are prominent in AngloGold Ashanti, where it has experienced declines of 78%, 46% and 43% at its surface operations and at the Mponeng and Kopanang mines respectively (Zhuwakinya, 2017). Impala Platinum also closed two of its loss-making shafts at its Rustenburg plant (Creamer, 2016). Sibanye is securing a loan to expand its operations in the US, to diversify operations and as part of a focus on developing as a “mine-to-market” operator in the PGM sector. The mining company has emphasised that, due to South Africa’s uncertain regulatory and political environment and consequent economic volatility, it is unlikely to make any large investments in the country (Seccombe, 2017b). Northam Platinum has been a key consolidator in the platinum market and has recently bought Glencore’s Eland Platinum mine. However, as part of the deal, Glencore will have exclusive rights to market and sell all chrome produced. This strategy is in line with the objective to become a 1-million ounce a year PGM producer (Seccombe, 2017a). Northam Platinum has also concluded a R405 million acquisition of Aquarius Platinum’s Everest mine in Limpopo in late 2015 (Creamer, 2016) and also recently invested in a platinum recycling operation in the US (Seccombe, 2017c). Jubilee Platinum is one of few PGM miners to have implemented expansion plans, and has commenced operations at its fully integrated chrome and platinum Hernic operation in March 2017. The company has also indicated that it remains on schedule with the commencements of platinum 22 Low carbon finance study (Phase 1 and 2) The World Bank concentrate production, confirming its strategy to become a significant player in the platinum industry (Mining Review Africa, 2017). Drivers, challenges and industry prospects PGMs Global platinum demand is driven by the electrical and glass sectors, jewellery demand, automotive industry and the retail market manufacturing chain (De Bruyn, 2017b). Platinum prices have remained low in recent years and many of the larger mining companies have announced measures to lower costs and reduce capital expenditure in response. The supply, demand and price of platinum is expected to remain relatively constant in the foreseeable future.13 Glaux Metal (2016) see no large swings in supply or demand up to 2021, and the April 2017 World Bank Commodity Markets Outlook expects only a marginal increase in the real platinum price by 2030. Over the long-term, however, the platinum industry faces demand risk from a switch in the automotive sector toward the production of electric vehicles. As a result, platinum miners have invested significantly in the development of hydrogen fuel cells and platinum catalysed fuel cells as a potential alternative to battery electric vehicles. Studies are also under way to establish the feasibility of fuel cell-powered load haul dumpers for use in underground mining. Locally, it forecast that South Africa’s platinum mine supply will decline from 2021 as miners continue to face higher costs from mining deeper shafts for lower ore grades. Several existing mines are also expected to come to the end of their lives by the early 2020s (de Bruyn, 2016). South Africa does however have more than 200 years’ worth of platinum reserves (StatsSA, 2015) and there are plans to develop more platinum mines in areas rich with PGM deposits. The PGM industry is also an IPAP focus sector. The IPAP has identified the fuel cells industry development initiative as a way of encouraging an increase in the demand for platinum, while supporting broader industrial development and minerals beneficiation in South Africa. Gold The near-term general global market outlook for the gold market is positive, with commentators forecasting that China, the world’s largest consumer of the metal, will maintain a high level of demand, as investors in that country seek alternatives in the face of a weakened local currency (Zhuwakinya, 2017b). From a South African perspective, however, gold deposits have been significantly depleted due to the long history of gold mining and remaining deposits are becoming increasingly expensive to extract. This has been exacerbated in the short-time, by rising production costs, specifically in terms of labour and electricity costs. It is estimated that half of the gold mining industry may be below operational break-even at current gold prices. (Zhuwakinya, 2017a). 13 See, for example projections for the platinum industry by Glaux Metal (2016) and World Bank Group (2017). 23 Low carbon finance study (Phase 1 and 2) The World Bank The long-term survival of the South African gold mining sector therefore depends on a shift to modernised mining methods. The adoption of semi-mechanised methods could see the useful lives of South African gold mines extended to well beyond 2045, but with future output levels close to current output being maintained over this period (Zhuwakinya, 2017b). 3.4.1.3 Other mining Figure 18 highlights trends from other mining commodities. Manganese ore production experienced the highest volume growth, increasing by 97% between 2008 – 2016 with 2015 production levels (the highest production levels over the period under review) being more than double what was produced in 2010. A general upward trend in iron ore and chromite production was experienced over the period under review with production increasing by 30% and 46% respectively between 2008–2016. The production of other metallic minerals has been declining since 2008. Figure 18: Other mining production (Index, 2010 = 100) 250 200 150 100 50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Iron ore Chromium Manganese ore Other metallic minerals Source: DNA Economics based on data from Statistics South Africa Figure 19 summarises South Africa’s trade in other mining products. The value of exports in other mining products, and specifically iron ore, manganese and chromium, have grown substantially since 2009, with the overall value of exports of other mining products increasing by roughly 250% between 2009 and 2016. The value of South African imports from the international market, by comparison, have remained negligible. The South African supply of other mining products generally meets demand. The sector therefore faces limited international competition. 24 Low carbon finance study (Phase 1 and 2) The World Bank Figure 19: South Africa’s other mining exports and imports (R million) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Chromium Iron Ore Manganese Other non-ferrous metal ores and concentrates Source: DNA Economics based on data from Department of Trade and Industry (DTI) Market dynamics and key developments Iron Ore South Africa has two large iron ore producers, Kumba Iron Ore and Assmang (a joint venture between Assore and African Rainbow Minerals). The collective output from these producers amounted to 58.8 tons of iron ore in 2016. About 98% of mined iron-ore is used in steel manufacture, the bulk of this originating overseas. China is the major global driver of steel demand currently, and recent decelerating Chines demand has had a significant impact on the iron ore industry. Low iron- ore prices forced Kumba Iron Ore to curtail output and cut jobs in 2016 at its flagship Sishen mine. In September 2015 it ceased mining operations at its old Thabazimbi mine, in Limpopo, as a result of the low iron-ore prices (Zhuwakinyu, 2017). Manganese South Africa is the world’s largest producer of manganese ore, dominating the global output market, meeting 24 percent of world exports in 2012 (Chamber of Mines, 2017). The country is also estimated to hold the largest reserves of manganese globally (Investing News, 2017). Manganese output is relatively concentrated, with a small number of producers in the market. Assmang is the dominant manganese ore producer in South Africa. The outlook for the sector is positive with plans for expansion by key producers. Assmang plans to extend its Manganese Mines at Black Rock to reach 4 Mt of manganese per annum by 2020. Kalagadi Manganese expects to start production in the fourth quarter of 2017 and reach full production capacity of 3Mt of manganese ore by end of 2018. 25 Low carbon finance study (Phase 1 and 2) The World Bank Drivers, challenges and industry prospects Iron Ore Iron-ore is the only sector of the South African mining industry that has shown real production growth over the past decade, with mine and transport infrastructure development enabling the sector to benefit from the higher prices due to the recent commodities boom in the international market. Despite this, the iron ore sector has also experienced a decrease in capital expenditure, with both Kumba Iron Ore and Assmang reporting a decrease in capital expenditure in the next few years. Investment in iron ore-related transport infrastructure has however increased with Transnet heavily investing in the bulk handling terminal at Saldanha Bay where iron ore is railed from the Northern Cape. Transnet recently increased the iron-ore export channel to its current capacity of about 60-million tonnes a year. Transnet also reported that a prefeasibility study to further expand export capacity to 75-million tonnes had been completed. Despite the global iron-ore market being oversupplied, it is expected that about 200-million tonnes will be added to total global production by 2020. Manganese Currently, the South African manganese sector is challenged by limited capacity at the Durban and Port Elizabeth ports (Edinger, 2014). The expected rail capacity demand in 2017 is estimated to be between 18 – 22 Mtpa, far outstripping supply. Transnet is expected to undertake the Port of Ngqura manganese export expansion project which will increase capacity to 16 Mtpa, though there is no confirmed completion date for this project. Approximately 95% of the demand for manganese ore is driven by the demand for manganese alloys, for example ferromanganese alloys, copper manganese alloys and nickel manganese alloys. Manganese ore is also used in the production of iron and steel. In 2012, 42% of exports were destined for China (Edinger, 2014), suggesting that future Chinese demand patterns will strongly influence South African production and investment in this sector. 3.4.2 Chemicals The chemical sector industry is very diverse in nature, with a wide range of products manufactured by a diverse number of companies. Industry classification distinguishes between “basic” and “other” chemicals. Basic chemicals involve to the manufacture of chemical products making use of basic processes such as thermal cracking and distillation. Examples of basic chemicals includes distilled water, dyes and pigments. Other chemicals encompass the manufacture of chemical and man-made fibres such as soap, pesticides, inks, and explosives (StatsSA, 2012). Figure 20 and Figure 21 provide a summary of the market for basic and other chemicals (aggregated with nuclear fuel and man-made fibres respectively). For nuclear fuel and basic chemicals, total domestic production amounted to just under R110 billion in 2014. Of this production roughly 33% was destined for the export market. Imports accounted for close to 40% of the domestic market. Nuclear fuel’s relative contribution to the values depicted in 26 Low carbon finance study (Phase 1 and 2) The World Bank Figure 20 is likely to be small. For the nuclear fuel market, South Africa exports uranium oxide material and imports all of its enriched uranium (van Wyk, 2013). The country produced 450 tons of uranium oxide in 2016 (Slater, 2017), reflecting that the uranium market is relatively small. Figure 20: Nuclear fuel, basic chemicals market summary (R billion, 2014) Nuclear fuel; and basic chemicals-production and consumption Local production, 72.66 Domestic consumption; 116.53 Exports, Imports, 43.87 36.59 Source: DNA Economics based on data from Statistics South Africa As seen in Figure 21, the other chemicals sector is relatively more localised than the basic chemicals sector. For other chemicals both exports and imports are a smaller proportion of the total market, when compared to processing of nuclear fuel and basic chemicals. Total domestic production was R123 billion in 2014. Exports accounted for 11% of total domestic production in 2014, while imports made up roughly 33% of total domestic consumption. Figure 21: Other chemicals, man-made fibres market summary (R billion, 2014) Other chemical products, and man-made fibres- production and consumption Local production, 109.46 Domestic consumption; 166.56 Exports, 13.68 Imports, 57.09 27 Low carbon finance study (Phase 1 and 2) The World Bank Source: DNA Economics based on data from Statistics South Africa Figure 22 below presents an upward trend in chemicals production over the 2008 – 2016 period. Although both basic and other chemicals production significantly declined in 2009, they have both since recovered to pre-2009 levels and in the case of other chemicals, production currently exceeds pre-2009 levels. Figure 22: Chemicals production (Index, 2010 = 100) 140 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Basic chemicals Other chemical products Source: DNA Economics based on data from Statistics South Africa Figure 23 below illustrates the utilisation of production capacity in the chemicals sector. The production and capacity utilisation for basic chemicals experienced a dip in 2009, and partially recovered to 2016. Over the 2008 – 2016 period, the basic chemicals industry has generally been characterised by higher levels of capacity utilisation compared to the other chemicals industry. Nonetheless, both industries recorded increased levels of capacity utilisation since 2009 which have returned to 2008 levels. Both the basic and other chemicals industries increased their capacity utilisation by 7% between 2009 and 2016. The production and the capacity utilisation data are indicative of a relatively stable chemicals sector that has experienced moderate growth rates over the last four years of the period under analysis. 28 Low carbon finance study (Phase 1 and 2) The World Bank Figure 23: Chemicals sector capacity utilisation (percentage) 100 90 80 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Basic chemicals Other chemicals Source: DNA Economics based on data from Statistics South Africa Figure 24 provides a summary of South Africa’s trade in basic and other chemicals. In terms of the overall chemical sector, South Africa has experienced a trade deficit since 2007. The value of both chemical sector imports and exports have increased significantly between 2007 and 2016. Overall chemical sector exports have increased from R27 billion in 2007 to more than R66 billion in 2016. Figure 24: South Africa’s chemical exports and imports (R million) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Basic chemicals Other chemicals Source: DNA Economics based on data from ITC Trademap Based on South Africa’s production of chemicals, a larger part of the increase in the value of exports is likely to be due to strong increases in the price (rather than the volume) of chemical products. The 29 Low carbon finance study (Phase 1 and 2) The World Bank growth in chemical sector imports has been even stronger, with chemical sector imports increasing from R47 billion in 2007 to close to R125 billion in 2016. Various factors have contributed to the rise in imports, including local cost pressures due to intensifying regulations on emissions and waste, and cost pressures emanating from the use of less competitive technologies and processes used in the production of chemicals. As a result, some chemical products manufactured locally are less competitive than similar international goods, and is likely to have contributed to the increase in imports over the review period (Oliveira, 2014). Market dynamics and key developments There are many upstream and downstream players within the broad chemicals sector, often with a high degree of specialisation in products. As a result, the chemical sector can be considered relatively competitive, though there may be high levels of concentration for specific product categories. Despite the growth in the chemical sector, new investments are increasingly being made outside of South Africa (CAIA, 2015). In 2015, it was reported that more than half of the fine chemicals synthesis plants have been shut down and relocations to other countries are taking place (CAIA, 2015). It was also reported that the sector was operating in ‘survival mode’ rather than focusing on strategic, long- term project planning and implementation. The investment activity taking place is largely market consolidation or an entry into different specialities/products. For example, in May 2017, chemical company Omnia Holdings acquired a 90% stake in Umongo Petroleum to both consolidate and diversify its product and regional offering. Umongo has also recently acquired 100% of Orbichem Petrochemicals, the distributor of the Ergon range of products in South Africa and sub-Saharan Africa (van Wyngaardt, 2017) Drivers, challenges and industry prospects Demand for chemicals is linked to local economic growth, and, in particular, the agriculture sector and infrastructure investment projects. In addition to low economic growth in recent years, chemical firms face challenges related to access to appropriately priced feedstock, poor and costly logistic service levels, electricity supply shortages and costs, skills shortages and outdated technology and processes used to refine and produce chemicals. For certain products one of the main challenges relates to price and supply uncertainty for imported inputs (Oliveira, 2014). For example, polypropylene and polyethylene production is currently constrained by a lack of inputs from oil refineries, impeding the ability of South African producers to meet domestic demand for plastic packaging materials and general household appliances. Overall, there is a high level of uncertainty regarding future growth prospects for the chemical industry, primarily given that demand for chemical products is directly related to overall economic 30 Low carbon finance study (Phase 1 and 2) The World Bank growth. The chemical industry is a priority sector in terms of the IPAP14 and new strategies and interventions are currently being developed to increase investment across the sector. However, given that slow growth in South Africa is constraining the local market for chemicals, it is not clear to what extent the IPAP interventions will be able to revitalise the sector. 3.4.3 Petroleum products Figure 25 provides a market summary for coke and petroleum products in 2014. Roughly 13% of total output in 2014 was destined for the export market, with total local production amounting to R162 billion. Roughly one-quarter of the domestic consumption market was made up of imports in 2014. Figure 25: Coke, petroleum market summary (R billion, 2014) Coke oven products; and petroleum refineries/ synthesisers- production and consumption Local production, 141.63 Domestic consumption; 191.01 Exports, Imports, 49.38 20.73 Source: DNA Economics based on data from Statistics South Africa Figure 26 below shows that the production performance of petroleum products has been relatively stable over the 2008 – 2016 period, having experienced a slight shock and subsequent recovery between 2011 and 2012. Although production levels remained stable between 2008 and 2009, they experienced a lagged decline in 2010 and 2011 following the financial crisis, dropping by 7% between 2009 and 2011. Another dip in production was experienced in 2015, but the sector has since recovered, growing by 6% between 2015 and 2016. Levels of capacity utilisation steadily declined in the three years following 2008, reaching 77% of capacity utilisation in 2011 – the lowest level of capacity utilisation over the period under review. Capacity utilisation experienced a spike in 2012 increasing by 6% between 2011 and 2012 before subsequently declining from 2013 to 2015. By 2016 capacity utilisation had recovered to roughly 14 Industry interventions put forward in IPAP 2017/18-2019/20 includes: a review of the Chemicals Sector Development Strategy that will outline programmes to increase employment and investment across the sector and achieve sustainable growth. 31 Low carbon finance study (Phase 1 and 2) The World Bank 2012 levels. The analysis suggests some expansion of production capacity over the period, given that the overall production has grown while capacity utilisation is lower between 2008 and 2016. Figure 26: Petroleum, coke and nuclear fuel production and capacity utilisation 120 120 100 100 Production (2010 = 100) Capacity utilisation (%) 80 80 60 60 40 40 20 20 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Production (2010 = 100) Capacity utilisation (%) Source: DNA Economics based on data from Statistics South Africa Figure 27 reflects that South Africa is a net importer of petroleum products. The value of imports increased substantially between 2009 and 2014, reaching close to R250 billion. This reflected both an increase in the volume of imports and the price of imported products. Following the collapse of the oil price in 2014, the value of imported petroleum products declined substantially to less than R150 billion in 2016. By comparison, South Africa’s exports of petroleum products are small, increasing from R13.8 billion in 2007 to R19.5 billion in 2016. Figure 27: South Africa’s petroleum exports and imports (R million) 300,000 250,000 200,000 150,000 100,000 50,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap 32 Low carbon finance study (Phase 1 and 2) The World Bank Market dynamics and key developments Table 4 provides details of key refineries in South Africa. The Market share of petroleum refineries has remained fairly constant since 2012 with only minor changes occurring, indicating production capacities have remained constant within this sector. Sasol Synfuels is the only coal-to- liquids (CTL) refinery in the world and has 100% share in South Africa’s CTL market. Similarly, PetroSA is the only gas-to-liquids (GTL) refinery in South Africa. The petroleum industry is highly concentrated with 80% of annual supply being produced by the country’s five petroleum refineries. These refineries also supply LPG via have long-term supply agreements with four large wholesalers namely Afrox, Easigas, Oryx Energies and Total Gas, who account for more than 90% of the market. Table 4: Petroleum (refineries) ownership and capacity Ownership Refinery capacity Refining capacity (% of Petroleum Refineries [bbl/day] total SA capacity) Shell South Africa (50%)- Sapref 180,000 34% BP Southern Africa (50%) Enref Engen Petroleum 135,000 25% Chevref Chevron South 110,000 21% Sasol (64%)- Total South Natref 108,500 20% Africa (36%) Ownership Refinery capacity Refining capacity (% of Coal and Gas Refineries [bbl/day] total SA capacity) Sasol Secunda (Synfuels) Sasol 150 000 100% Ownership Refinery capacity Refining capacity (% of Gas Processed Refineries [bbl/day] total SA capacity) PetroSA PetroSA 45 000 100% Source: DNA Economics based on information from company annual reports. There are several projects currently underway in the petrochemicals sector, including the construction of Sunrise Energy’s liquefied petroleum gas import terminal at Saldanha Bay in the Western Cape. Sunrise Energy is majority owned by MOGS (60%), a subsidiary of Royal Bafokeng Holdings and Phase 1 of the project will consist of 5,500 metric tons of storage (Creamer Media, 2017). Other recent activity in the sector includes an agreement between Transnet National Ports Authority and Oiltanking Grindord Calulo (OTGC) that will see OTGC plan, fund, construct and maintain and operate a new liquid bulk handling facility in the Port of Ngqura in the Eastern Cape. Construction is due to begin in the fourth quarter of 2017 with commissioning planned for the third quarter of 2019 (Venter, 2017). Phase 1 of the liquid bulk facility will provide approximately 150,000m3 of storage capacity for refined petroleum products and future phases will add another 550,000m3 of storage capacity and handling (Venter, 2017) Chevron has decided to divest its South African refining assets in response to a planned increased investment in fuel storage facilities that would lead to greater imports of refined fuel into the South African market, and a regulatory requirement to invest $1 billion to upgrade its Cape Town refinery to meet more stringent local fuel quality specifications. Chevron believed the combination of these 33 Low carbon finance study (Phase 1 and 2) The World Bank factors would reduce the competitiveness of its Cape Town refinery and has, after close to two years, found a buyer for its South African assets.15 Drivers, challenges and industry prospects Recent investments in the petrochemicals industry are directed towards increasing the capacity to import refined products, and the related capacity to handle and store these products. Imports may thus compete more aggressively with local production in future, which reduces the attractiveness of new local refining capacity. In addition, PetroSA’s financial performance introduces uncertainty over the sustainability of GTL in South Africa. PetroSA has suffered significant financial losses over the past three years with a projected a financial loss of R2.2 billion in the year to end-March 2017. The company stated that exogenous factors such as weak commodity prices and volatile currency swings will continue to pose threat to their company. If PetroSA is unable to turnaround its financial performance, that may strengthen the case for a new refinery, or it may simply lead to higher imports of refined product. From a policy and regulatory perspective, there is ongoing uncertainty regarding future demand due to significant disruptive forces such as Eskom electricity prices; increased competitiveness of solar photovoltaic (PV); grid-tied power supplementation; grid defection and energy switching (for example to gas power, gas cooking and/or solar water heating); new emerging domestic, commercial and utility scale battery storage technologies; and the entry into the market of electric vehicles at scale (Yelland, 2016). Refineries will also be required to make significant investment to meet new clean fuel standards in the short to medium term, and a suitable mechanism for financing these investments has not been found.16 This (coupled with the current draft Integrated Energy Plan seeing a much larger role for the import of refined petroleum products over the period to 2050) has led to significant uncertainty within the local petroleum refining industry (DoE, 2016). The events surrounding the sale of Chevron assets is seen as one example of the tangible impact of this uncertainty. 3.4.4 Non-metallic mineral products (focusing on cement) Figure 28 provides a summary of the non-metallic mineral products market, of which cement is the predominant sub-sector. Total domestic production in 2014 was roughly R50 billion. Of this production, less than 7% was destined for the export market. In terms of the domestic market, imports accounted for roughly 6% of domestic consumption. Cement is a low value-high volume commodity, making it relatively expensive to transport. As a result, cement plants are usually located close to 15 Chevron had initially agreed sale terms with the China Petroleum & Chemical Corp (Sinopec) in March 2017 (Burkhardt, 2017). Prior to the Sinopec deal, the Chevron assets had been on the market for more than a year (Njobeni, 2017). As of October 2017, it has been announced that the commodity trading company Glencore has stepped in to replace Sinopec as a buyer of Chevron assets. 16 Both the petrol and diesel markets are regulated in South Africa, and the pricing formula does not allow for recouping the cost of investment into cleaner fuels. 34 Low carbon finance study (Phase 1 and 2) The World Bank end-user markets or to the raw material source and this may explain the low proportion of exports and imports in the overall non-metallic mineral sector (al Emeran, 2016). Figure 28: Non-metallic mineral products market summary (R billion, 2014) Non-metallic mineral products- production and consumption Local production, 47.01 Domestic consumption; 55.84 Imports, 8.83 Exports, 2.98 Source: DNA Economics based on data from Statistics South Africa Figure 29 below depicts the change in production and capacity utilisation for the non-metallic minerals sector. Production in the non-metallic mineral sector saw a drastic fall during 2009 with production declining by 20% compared to 2008 production levels. Overall, the sector has struggled to recover from this decline, with production levels remaining at significantly lower levels through to 2016. In fact, production of non-metallic mineral products has shrunk by 26% since 2008 levels. Production levels did however, recover somewhat in 2011 (5%) and 2013 (2%) however, this growth was offset by weaker production levels in all the other years under review. An analysis of the sector’s capacity utilisation reveals that even in the wake of lower levels of production, capacity utilisation has remained relatively positive, with an upward trend since 2011. Prior to slightly higher levels of capacity utilisation in 2012, levels of utilisation declined by 9% between 2008 and 2011. Although utilisation did recover steadily over the 2012 – 2016 period, the level of utilisation remains significantly lower compared to 2008 levels. Overall, there are slight deviations between production and utilisation over the period, suggesting that there may have been some removal of capacity. 35 Low carbon finance study (Phase 1 and 2) The World Bank Figure 29: Non-metallic mineral production and capacity utilisation 140 140 120 120 Production (2010 = 100) Capacity utilisation (%) 100 100 80 80 60 60 40 40 20 20 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Production (2010 = 100) Capacity utilisation (%) Source: DNA Economics based on data from Statistics South Africa Figure 30 provides a summary of South Africa’s trade in cement products, by value. The figure reflects that South Africa was a net importer of cement products (by value) between 2007 and 2008, but moved to a net exporter of cement products between 2009 and 2011. From 2011 the value of cement imports has increased substantially, while the export value of cement has fallen, resulting in South Africa experiencing a trade deficit in these products. The sharp increase in imports in 2011 was primarily a result of dumping by Pakistani exporters, with resulting anti-dumping tariffs seeing imports decline over 2015 and 2016. Figure 30: South Africa’s cement exports and imports (R million) 1,200 1,000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap 36 Low carbon finance study (Phase 1 and 2) The World Bank Market dynamics and key developments - cement Table 5 lists key cement producers, their capacity and market share. Currently PPC has more than 50% of the market share of the cement industry in South Africa, and the sector has high overall levels of concentration. Table 5: Cement Production Capacity and Market Share Cement Producers Cement capacity [Mtpa] Current market share (%) PPC 17.0 54% Afrisam 3.8 12% Lafarge 3.4 11% NPC-Cimpor 1.6 5% Sephaku Cement 2.8 9% Mamba Cement 1.0 7% Other operators (non-producers) 2.1 3% Source: DNA Economics based on information from company annual reports. Recent capacity changes within the industry include PPC on schedule for commissioning and ramp- up in 2018 of their 1 Mtpa new clinker production line at PPC Slurry. Production is set to increase by 50 percent to 2.1 Mt/year towards the end of 2016. (SAPIA, 2012). In addition, some additional capacity has been introduced through the entry of Mamba Cement in 2015/16. The South African cement market has seen 2.5-million tonnes of annual capacity added in 2014 with the completion of Sephaku Cement’s new plant in North West province. Sephaku Holdings also invested in new capacity in the cement production and related products sector over the 2016 financial year (Sephaku Holdings Ltd, 2016). The Coega Industrial Development Zone has recently announced three new investment projects to the zone including a R650 million manufacturing cement grinding plant by MM Engineering, a R71 million ready mix concrete plant by Kenako Concrete and a R350 million gas cylinder plan by Osho Cement (Gillham, 2017). The lead times on these projects is likely to take as much as 6-9 years from the point when the initial investment decision is made (al Emeran, 2016). Beyond these new entrants and announcements, the market appears to have entered a period of consolidation, with major producers in merger or acquisition talks. PPC has announced that it has revived merger talks with its competitor AfriSam following merger evaluation rounds in 2014 that resulted in both companies agreeing to end merger talks (Mahlaka, 2017). Following the acquisition of Safika, Pronto Readymix (including Ulula Ash) and 3Q Mahuma Concrete (Pty) Limited, PPC now operates a total of nine cement factories, four milling plants, five blending facilities and 26 ready mix batching plants in South Africa (PPC, 2016). Drivers, challenges and industry prospects - cement Cement consumption is closely linked to the level of economic development within a country as well as the economic cycle. Infrastructure and property investment are key drivers of the cement industry. 37 Low carbon finance study (Phase 1 and 2) The World Bank Over the long-term prospects for cement demand are positive, given the expected urbanisation growth rates (and the resulting infrastructure and property needs) for South Africa and the region (al Emeran, 2016). Infrastructure spending may also provide some support for the cement market in the short- to medium-term. South Africa’s infrastructure market value increased by almost R70 billion between 2010 and 2015, and is set to increase by another R113 billion by 2020 (Naidoo, 2017). However, the deteriorating fiscal position for the South African government implies a strong risk that some of the planned infrastructure expenditure will be curtailed or delayed. In terms of import competition, following a period of increased foreign competition, the stabilising price environment (together with anti-dumping duties imposed on certain importers) is a positive development for the industry. From a supply perspective, long-term investment in the industry may be hampered by the fact that the only available unused raw materials are in the Northern Cape province, which is geographically far from the end cement user (al Emeran, 2016). 3.4.5 Iron/Steel (including ferrous alloys) Figure 31 provides an overview of the South African iron and steel market (aggregated with the metal casting (ferrous alloys) market). Ferrous alloy products include Ferrochromium, Ferromanganese, Ferrovanadium and Ferrosilcon. Total domestic production of iron and steel and ferrous alloys amounted to roughly R157 billion in 2014, of which just more than 40% was destined for the export market. Domestic consumption was just under R110 billion, with imports accounting for close to 17% of this. Figure 31: Iron, steel and metal casting market summary (R billion, 2014) Iron and steel and casting of metals- production and consumption Local production, 90.72 Domestic consumption; 109.44 Exports, Imports, 18.72 65.77 Source: DNA Economics based on data from Statistics South Africa South Africa manufactures and exports primary carbon steel products and semi-finished products in the form of flat and long products, as well as flat stainless steel. Imports have historically been 38 Low carbon finance study (Phase 1 and 2) The World Bank dominated by alloy steel (Merchantec Research, 2014). This specialisation in exports is linked to the country’s iron ore grade, availability of metals to create alloys, and the type and size of steel process technology (furnace). Figure 32 shows that the physical volume of production for basic iron and steel (including ferrous alloys) products has remained relatively constant from 2009 to 2016. Production has not recovered to pre-global economic crisis level. The capacity utilisation trend for basic iron and steel products has also remained relatively constant from 2008 to 2016 ranging from 73 to 79%, dropping below 70% during 2009, likely because of the global economic crisis in 2008/2009. Figure 32: Iron and steel (incl. ferrous alloys) production and capacity utilisation 140 140 120 120 Production (2010 = 100) Capacity utilisation (%) 100 100 80 80 60 60 40 40 20 20 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Production (2010 = 100) Capacity utilisation (%) Source: DNA Economics based on data from Statistics South Africa Figure 33 shows that South Africa has historically been a net exporter of iron and steel products. However, since 2009 the sector appears to have experienced strong growth in the value of iron and steel products imported. Between 2009 and 2016, the value of iron and steel products imported has almost doubled, while exports have grown by less than 10%. Imports into the local market have become more attractive due to long local steel lead times and limitations on available grades. The global iron and steel market has also been in oversupply, making imports highly competitive. 39 Low carbon finance study (Phase 1 and 2) The World Bank Figure 33: South Africa’s iron and steel exports and imports (R million) 30,000 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap Figure 34 illustrates South Africa’s position as a net exporter of ferrous alloys. Since 2009 the value of ferrous alloy exports has grown significantly, with exports of these products more than doubling. By 2016, the export value of ferrous alloys had exceeded 2008 levels. Figure 34: South Africa’s ferrous alloys exports and imports (R million) 60,000 50,000 40,000 30,000 20,000 10,000 0 Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Ferro-manganese Ferro-chromium Ferro-nickel Other ferro-alloys Source: DNA Economics based on data from ITC Trademap However, within the ferrous alloy sector, exports of ferro-manganese, ferro-nickel and other ferro- alloys has fallen between 2008 and 2016. The consumption of these alloys tends to follow primary carbon steel production very closely and these particular grades of ferro-alloys are likely to faces similar headwinds as local iron and steel producers. 40 Low carbon finance study (Phase 1 and 2) The World Bank The fall in exports of these alloys has been countered by strong export growth in ferro-chromium products. South Africa is a leading producer of ferrochrome, an important input in the manufacture of stainless steel. Demand from China, the world’s leading producer of stainless steel, has been robust in the aftermath of the global financial crisis which has been positive for ferrochrome (Onal, 2015). Imports of ferrous alloys are small by comparison to sector exports. Market dynamics and key developments Iron and steel The current market for iron and steel is concentrated, with Arcelor Mittal SA (AMSA) Pty Ltd the dominant producer. There are, however, several smaller producers in the sector. The industry has experienced contraction in recent years. Evraz Highveld Steel and Vanadium Corporation, the second largest producer, entered business rescue in 2015 ceasing production of iron and steel. Efforts are currently being made to rehabilitate work at the Highveld Steel’s heavy structural mill where production is dependent on a 10% base protection for the products. (Creamer, 2017). A significant development for AMSA, the largest iron and steel producer in South Africa was a renegotiated agreement for iron ore inputs. In 2009, Kumba Iron Ore gave notice to its largest local customer, AMSA, that it would no longer sell iron ore to it at cost plus 3% and in 2013, both parties agreed for iron ore to be delivered to AMSA at cost plus 20% (Allix, 2013). This has significantly impacted AMSA’s profitability. Ferrous alloys Noteworthy ferrous alloy producers (based on industry output) include Glencore-Merafe Chrome Venture, Samancor and Assmang. The number of industry players across the different products varies but, in general, the ferrous alloys sector can be considered relatively concentrated. The current production capacity of ferroalloys in South Africa is estimated to be 4.6Mt, this value excludes the producers who are currently under business rescue. Ferrochrome made up approximately 63% of South Africa’s ferroalloy production in 2013. Between 2015 and 2016, a number of ferrochrome producers went into business rescue or reduced their output. The South African ferrochrome market is now going through a consolidation phase, which could result in some of these plants coming back into operation (Smith, 2016). For example, a newly created joint venture between Sinosteel and Samancor is predicted to prevent or lessen competition in the ferrochrome market (van Wyngaardt, 2017). South Africa’s ferrochrome market is expected to be dominated by two major players, namely, Samancor and Glencore in the future, with smaller less competitive operations being brought out. Drivers, challenges and industry prospects Iron and Steel 41 Low carbon finance study (Phase 1 and 2) The World Bank In addition to the global oversupply of iron and steel, local producers have also been hit by weak economic growth in South Africa. This weak economic growth has impacted the building and construction sector, which accounts for close to two-thirds of local steel demand (Arcelor Mittal South Africa , 2016). The mining sector, another large user of iron and steel, has been struggling due to labour unrest and declining commodity prices. These factors have had a negative impact on the profitability of local iron and steel producers. The iron and steel sector has also experienced some headwinds in the form of increasing input costs (such as electricity, transport and labour), and a reduction in capacity due to a lack of modernisation of steel plants and poor maintenance (Merchantec Research, 2014). The unreliability of electricity supply between 2008 and 2015 has also led to a decline in the use of electric furnaces and, by extension, a decline in production. From a policy perspective the iron and steel sector remains a priority sector in terms of the IPAP, and several interventions have been implemented to stabilise this sector. These include implementing import tariffs on basic iron and steel products, designating steel and steel products for local procurement to ensure maximum use of local products across public sector infrastructure-build programmes, the creation of a Steel Industry Competitiveness Fund administered by the Industrial Development Corporation (IDC), and the use of tax incentives. Anti-dumping tariffs certain flat hot- rolled steel products is also expected to be implemented from June 2017 for a period of three years. Despite the policy prioritisation of the iron and steel industry, the sustainability of the sector has been called into question (TIPS, 2016). From an operating cost perspective, the industry’s lack of investment into modernising plants during the commodity boom is perceived to have significantly impacted capacity utilisation and profitability rates (TIPS, 2016). The exit of companies, as previously highlighted, together with cost pressures being experienced by the largest iron and steel producer does not augur well for the sector as a whole. Ferrous Alloys South Africa is one of the leading suppliers of ferroalloys globally. Despite the challenges that have faced the ferroalloy producers, specifically rising electricity prices, unstable ore supply due to PGM market dynamics and price volatility, there is a positive outlook for vanadium, chrome and manganese markets (Wilkinson, 2017). Prices have also recovered for ferrochrome due to Chinese demand moving to its highest levels since the global financial crisis (Wilkinson, 2017). 3.4.6 Non-ferrous metals (focusing on aluminium) Figure 35 shows the market for the overall precious and non-ferrous metals sector.17 Total production was close to R50 billion in 2014. Of this, more than 90% was destined for the export market. It is important to note that precious metals account for the major share of production and 17 Non-ferrous metals refers to metals and alloys that do not contain iron (ferrite). These include nickel, lead, zinc, aluminum, copper, tin, titanium, with alloys such as brass and bronze. The market summary data does not disaggregate these non- ferrous metals from precious metals (gold, silver and platinum) and rare metals (mercury, cobalt, lithium and vanadium). The market summary analysis therefore provides an overview of the overall precious and non-ferrous metals sector. 42 Low carbon finance study (Phase 1 and 2) The World Bank export values. Conversely, the domestic consumption market is almost entirely made up of imports, with local production estimated to account for less than 6% of the domestic consumption market. South Africa’s exports of non-ferrous metals include copper, titanium, aluminium and vanadium. Figure 35: Precious and non-ferrous metals market summary (R billion, 2014) Precious metals and non-ferrous metals- production and consumption Imports, 51.8 Domestic consumption; 55.32 Exports, 46.24 Local production, 3.52 Source: DNA Economics based on data from Statistics South Africa Figure 36: Basic precious and non-ferrous metal products production and capacity utilisation 120 120 100 100 Production (2010 = 100) Capacity utilisation (%) 80 80 60 60 40 40 20 20 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Production (2010 = 100) Capacity utilisation (%) Source: DNA Economics based on data from Statistics South Africa Figure 36 depicts the physical volume of production for precious and non-ferrous metal products. Seemingly production follows its capacity utilisation trend for the non-ferrous metals sector, indicating limited changes to production capacity over this period. Trends for production and utilisation capacity show that there has been limited growth within the precious and non-ferrous 43 Low carbon finance study (Phase 1 and 2) The World Bank metals sector, with production having decreased by 6% and capacity utilisation by 10% from 2008 to 2016. Figure 37 focuses on aluminium and highlights that South Africa is a net exporter of aluminium products. The value of exports fell in 2009 but recovered to pre-2009 levels by 2011. Beyond this, aluminium exports have continued to grow (in value), with the value of exports in 2016 close to R20 billion. Since 2009 the value of imports has also grown significantly, increasing by more than 250% to over R11.5 billion in 2016. Figure 37: South Africa’s aluminium exports and imports (R million) 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap For aluminium, most of South Africa’s producers’ output is exported, but sufficient capacity exists to supply much of South Africa’s metal needs. The largest consumers of aluminium alloys are the electrical (24%), packaging (18%), building and construction (14%) and automotive (14%) industries. The South African smelters can provide most of the alloys required for these industries and where local demand cannot be met for special alloys and / or special semi-fabricated product sizes, these are imported (Govender, et al., 2016). Market dynamics and key developments – aluminium There are two local aluminium smelters in South Africa, Hillside and Bayside, both located in Richards Bay in the South African province of KwaZulu-Natal. These are the primary sources for aluminium for other secondary operations which re-melt and cast into various aluminium products. Hillside aluminium smelter is fully owned and operated by South 32. The South 32 smelter is operating at half its capacity, with the company yet to restart production in the 22 pots that were taken off line in September 2015 in response to market conditions. 44 Low carbon finance study (Phase 1 and 2) The World Bank Bayside, previously owned by BHP Billiton ceased smelting operations in 2014 and the Bayside Casthouse (which does not produce primary aluminium) was sold to a broad-based black economic empowerment (B-BBEE) company, Isizinda Aluminium on 30 June 2015. Drivers, challenges and industry prospects – aluminium The global demand for aluminium largely hinges on China’s economic recovery and/or its reduction in production volumes while the South African aluminium industry faces a number of headwinds and challenges. Electricity supply has been a key challenge for the aluminium industry, with plans to develop a new aluminium smelter in Coega Industrial Development Zone collapsing due to electricity capacity constraints. Due to the unreliability of, and price increases in, electricity the cost of production for aluminium smelters has increased significantly. Increased global demand for aluminium scrap has pushed prices up and this has also impacted on the profitability of local foundries, since they have to pay more for the scrap metal to produce recycled aluminium. Local demand of aluminium is small relative to the export market and industry growth will therefore largely be determined by reliability and cost of electricity supply as well as the global demand for primary aluminium (Govender, et al., 2016). Precariously for the aluminium industry, the draft South African Aluminium Industry Roadmap suggests that the future of the sector hinges on a pricing agreement between Eskom and the major remaining Aluminium smelter. This agreement, between South 32’s Hillside smelter and Eskom, is set to expire in 2028 if it cannot be renegotiated and renewed (DST and CSIR, 2017). 3.4.7 Glass Figure 38 provides a summary of the total South African glass market for 2014. Total domestic output is estimated to have amounted to R10 billion 2014. Of this output, roughly 5% was exported. The domestic consumption market is made up of roughly 25% imported products Figure 38: Glass manufacturing market summary (R billion, 2014) Glass and glass products- production and consumption Local production, 9.56 Domestic consumption; 12.81 Exports, Imports, 3.26 0.51 45 Low carbon finance study (Phase 1 and 2) The World Bank Source: DNA Economics based on data from Statistics South Africa Figure 39 depicts a negative growth trend for glass production since 2008. There was a slight increase in production from 2012 to 2013 followed by a decline in the subsequent years (2014 to 2016). In terms of capacity utilisation, trends for glass and glass products show that the sector has experienced a 10% decrease since 2008 to 2016. Figure 39: Glass and glass products production and capacity utilisation 120 120 100 100 Production (2010 = 100) Capacity utilisation (%) 80 80 60 60 40 40 20 20 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Production (2010 =100) Capacity utilisation (%) Source: DNA Economics based on data from Statistics South Africa Figure 40 highlights that South Africa is a net importer of glass products. While, in value terms, growth in glass exports has been modest (growing from R1 billion to R1.5 billion between 2010 and 2016), the sector has seen strong import growth between 2009 and 2016. Over this period the value of imports has more than doubled to R3.6 billion. Together with the decline in production it is clear that the industry is facing increasing import competition, with the domestic market share of imports likely to have increased since 2009. 46 Low carbon finance study (Phase 1 and 2) The World Bank Figure 40: South Africa’s glass exports and imports (R million) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap Market dynamics and key developments Table 6 provides a summary of key glass producers, their production capacity and market share. The glass industry is currently dominated by three large players namely Consol, PG Group and Nampak. Consol Glass is the largest producer of glass packaging products in Africa, PG Group owns companies in both the building and the automobile glass sector; and Nampak, which increased their glass bottling production capacity and now manufactures one-third of all glass bottle products in South Africa (Report Buyer, 2016). Table 6: Glass Production Capacity and Market Share Cement Producers Glass capacity [tpa] Current market share (%) Consol 926 000 62% PG Group 290 000 19% Nampak 285 000 19% Source: DNA Economics based on information from company annual reports. In 2015, Nampak exited various of its low-margin South African businesses in favour of expanding its footprint on the continent within other African countries such as Angola and Nigeria (Wilkinson, 2017). The decline in the South African glass industry can also be demonstrated by the fact that Spectrum Glass Company was forced to close their operations after 40 years due to market factors and the fact that sales never fully recovered following the recession (Mavuso, 2016). Drivers, challenges and industry prospects The glass industry provides packaging for sectors including wine, beer, food, fruit juice, mineral water, soft drinks, spirits, alcoholic fruit beverages and pharmaceuticals. The demand from the wine and 47 Low carbon finance study (Phase 1 and 2) The World Bank flavoured alcoholic beverages sectors is therefore a key demand driver in the glass industry. Recent declines in the glass industry were primarily attributed to substitution away from glass to other packaging materials in the carbonated soft drink market. Sluggish growth, low consumer confidence and changing preferences (away from glass) in key exports markets continue to impact on consumer spending and hence the demand for packaging such as glass (Wilkinson, 2017). Imports of glass products also continue to pose a threat to the local South African glass industry. Imports have become more price competitive against locally manufactured glass products, primarily due to rising cost inputs for South African producers. As a result, glass companies are looking at expansion in the rest of Africa in an attempt to offset declining domestic profits (GRDS, 2016). 3.4.8 Pulp and Paper Figure 41 provides a summary of the pulp and paper market. Total production is estimated to have equalled R77 billion in 2014. Of this production roughly 13% was destined for export markets. Imports accounted for roughly 15% of total domestic consumption in 2014. Paper products include packaging and speciality papers (containerboard, tissue paper and kraft paper), graphic and printing papers (coated and uncoated paper for printing and newsprint), and dissolving wood pulp or chemical cellulose (an input for textiles such as viscose) (SAPPI, n.d). A key export product for the local industry is dissolving wood pulp, whilst imports include various types and grades of paper that are either in short supply or are not produced locally. Figure 41: Pulp and paper market summary (R billion, 2014) Paper and paper products- production and consumption Local production, 67.22 Domestic consumption; 78.64 Imports, 11.42 Exports, 10.16 Source: DNA Economics based on data from Statistics South Africa Figure 42 indicates how the physical production volume of paper and paper products has recovered since the global economic crisis with production increasing from 2009 to 2016. The capacity utilisation rate of paper and paper products has remained between 85 and 92%, even during the global economic crisis. This, however, is likely the result of potential plant closures that may have occurred due to the recession in 2009. 48 Low carbon finance study (Phase 1 and 2) The World Bank Figure 42: Paper and Pulp Products- Production (2010 = 100) and capacity utilisation (%) (SIC:323) 120 120 100 100 Production (2010 = 100) Capacity utilisation (%) 80 80 60 60 40 40 20 20 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Production (2010 = 100) Capacity utilisation (%) Source: DNA Economics based on data from Statistics South Africa Figure 43 reflects the strong export recovery of pulp and paper products, in value terms, since 2009. Between 2009 and 2016 the value of exports doubled to just under R20 billion. However, over this period, imports have also grown significantly, with imports increasing from R7.2 billion in 2009 to just under R16 billion in 2016. Capacity constraints in the forestry sector have limited the growth in pulp supply, constraining overall supply into the local market. Figure 43: South Africa’s pulp and paper exports and imports (R million) 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Imports Source: DNA Economics based on data from ITC Trademap 49 Low carbon finance study (Phase 1 and 2) The World Bank Market dynamics and key developments Sappi and Mondi are the key producers for paper and pulp products with an approximate market share of 55% and 34% respectively, based on their latest production values. Other paper and pulp producers include Mpact, Twinsaver and Kimberly Clark. In terms of tissue grades, an additional 100,000 tonnes of new capacity is expected to come online at four different companies during the next 18 months. In terms of capacity increases, Mpact is currently upgrading its Felixton Mill from 60 000 tons to 215 000 tons per annum. Sappi intends to increase its pulp capacity by 1Mtpa by 2025 (Talevi, 2017). Furthermore, the IDC is currently conducting feasibility studies into the establishment of new mills in in Richards Bay and Frankfort (Wilkinson, 2016). Despite no plans to exit the South African market, both Mondi and Sappi are looking to increase their investments outside of South Africa. While Sappi does have plans to expand its dissolving wood pulp business in South Africa, all of Mondi’s recent acquisitions have been outside of South Africa (Talevi, 2017). Drivers, challenges and industry prospects Challenges facing the paper industry include drought, the cost of electricity and transport and water insecurity. Local production levels also continue to suffer as a result of capacity constraints in the forestry sector and the unavailability of certain paper grades in the local market. Production of printing and writing paper continue to gradually decline due to a shift towards electronic media, industry cost pressures, changing consumer preferences and increasing competitiveness of imports for certain grades of paper (The dti, 2017a; Talevi, 2017). Packaging, tissue and chemical cellulose products have been identified as the main growth areas for South Africa’s pulp and paper sector (PAMSA, 2016; Talevi, 2017). Despite plastic substitution challenges, production of packaging grades has increased and is showing sustained growth nationally and internationally. Continued growth in e-retailing is also expected to drive demand for packaging materials in the foreseeable future, and there is growing demand for dissolving wood pulp from the textiles industry. The IPAP also identifies a number of strengths and opportunities for the paper and pulp industry, including improvements to raw materials through investments in recycling, skills development, infrastructure development through investment in rail networks closer to forest plantations, new market developments such as co-generation opportunities and new product development for nano- cellulose applications and green chemicals. 50 Low carbon finance study (Phase 1 and 2) The World Bank 4 ENERGY AND GREENHOUSE GAS EMISSIONS PROFILES OF HEAVY INDUSTRY This section profiles the industrial sectors covered by this study in terms of their energy use and greenhouse gas emissions, to help support the identification and prioritisation of low carbon investment options. Given that there are no complete data sources available to generate comprehensive energy and GHG profiles for all sectors, the data presented here is collated from several different sources18. Due to the way that available energy and emissions data is reported, there is not complete overlap between the sectors covered in Section 0, however the sectoral classifications have been aligned as far as possible. Box 6 Note on benchmarking South Africa industry's energy and emissions profile Benchmarking local industry is challenging given the different process routes, electricity supply profile and age of equipment across companies within sectors, and as well as different system boundaries used in various literature sources that present energy and emissions data. A previous study explores these considerations in detail (Ecofys and The Green House, 2014), with some of the challenges associated with benchmarking a selection the focus sectors of this report being presented in Appendix 7. The use of benchmarking to prioritise sectors or low carbon investment options is, however, not pursued further in this study. 4.1 Industry energy input costs Table 7 provides a summary of estimates of energy input costs by sector, using the most recent input-output table provided by Statistics South Africa. A summary of energy input costs by sector using supply-use tables is also provided in Appendix 619 The input-output table assessment uses inputs of the coal, coke / petroleum and electricity (including gas and water) sectors as a proxy for energy usage by the industrial sectors included in this study. Three sectors appear to have a comparatively high proportion of total energy input costs as a proportion of total costs.20 These are the mining and (specifically gold / PGM mining), basic chemicals 18 The DoE publishes South Africa’s energy balance database, which has the broadest coverage of energy data in South Africa of any source. At the time of writing, the energy balance was available until 2014. Various challenges were identified with using this database at the core of this current study, including significant concerns surrounding data quality, changes to accounting approaches over time and the fact that the sectors are not always perfectly aligned with those considered here. Where data is lacking from other sources, energy balance data is included in this report to provide an indication of the relative contribution of energy carriers in different sectors. However, it is important to highlight that inclusion of this data does not attest to its accuracy in any way. 19 Both the input-output and supply-use tables provide a similar framework for tracing and assessing the productive structure of an economy, by providing an estimate of the supply/demand relationship between different sectors in the economy. The key difference between the Statistics South Africa input-output and supply-use tables is that the supply-use tables (one table for supply and one table for use) include both products and industries, whereas the input-out table is a single symmetrical table based on industry classification. For more see (Statistics South Africa, 2015). Importantly, this analysis provides an estimate of the proportion of input costs prior to the inclusion of depreciation in sector costs. 20 Depending on the use of different frameworks, the portion of energy inputs by sector can be substantially different. This is especially so for the Gold and PGM mining sector, where the input-output table suggests a much higher use of electricity inputs when compared to the analysis based on the supply-use tables. 51 Low carbon finance study (Phase 1 and 2) The World Bank (including nuclear fuel sector) and the iron and steel sectors. In these sectors energy input costs range between 12% and 13% of total input costs. For specific energy sources, the sector with the highest proportion of coal input is the coke / petroleum sector, with these inputs making up 6.7% of total input costs in this sector. This is likely to be largely due to coal to liquid processes undertaken by the predominant firm in this sector. It should be noted, however, that the production of non-ferrous metals is aggregated together with the refining of precious metals in the input-output tables under SIC352.21 This dilutes the impact of energy costs in the non-ferrous metals sector, since electricity is generally accepted to make up about a third of the cost of aluminium production (Burns, 2015). This sector is thus expected to be the most energy-intensive of the focus sectors. The iron and steel sector has the highest proportion of coke oven / petroleum product input costs in the production process, with these inputs accounting for 6.3% of total input costs. Based on the input- output or table, either the basic chemicals sector (including the nuclear fuel sector) has the highest electricity proportion in total input costs. For this sector, electricity, gas and water inputs account for 8.7% of the industry’s total input costs. From a production cost perspective (which effectively includes an industry’s operating margin), the same three sectors are identified as having a high proportion of energy input costs into the total production cost. It should be noted, however, that the estimates of energy input costs in Table 7 are lower than general estimates provided by some industry stakeholders during consultations, which is probably due to aggregation issues. There was a consensus amongst stakeholders that rising energy costs, and particularly electricity costs, were a concern from a competitiveness perspective. 21 See https://www.statssa.gov.za/additional_services/sic/mdvdvmg3.htm#352. 52 Low carbon finance study (Phase 1 and 2) The World Bank Table 7: Energy input by sector using Input-Output tables (2014) – based on input costs % of input costs (incl. Mining Manufacturing wages) Basic Coke chemicals Non- Non- Gold / Pulp and oven / Other Iron and Sector Coal Other and Glass metallic ferrous PGM paper petroleum chemicals steel nuclear minerals metals products fuel Coal 0.01% 1.19% 0.92% 3.03% 6.73% 0.21% 0.05% 0.14% 2.34% 1.36% 0.03% Coke oven / petroleum 1.64% 2.74% 2.20% 0.52% 0.76% 3.86% 1.13% 0.00% 0.11% 6.33% 1.44% Electricity, gas, water 2.89% 8.44% 3.19% 2.15% 0.94% 8.70% 3.65% 6.25% 2.50% 4.61% 5.63% Total energy input 4.54% 12.37% 6.31% 5.70% 8.43% 12.77% 4.83% 6.39% 4.95% 12.30% 7.10% % of output Mining Manufacturing (production cost) Basic Coke chemicals Non- Non- Gold / Pulp and oven / Other Iron and Sector Coal Other and Glass metallic ferrous PGM paper petroleum chemicals steel nuclear minerals metals products fuel Coal 0.01% 0.86% 0.62% 2.71% 5.26% 0.19% 0.05% 0.13% 1.91% 1.31% 0.03% Coke oven / petroleum 0.94% 1.99% 1.48% 0.46% 0.60% 3.58% 1.10% 0.00% 0.09% 6.11% 1.30% Electricity, gas, water 1.65% 6.14% 2.14% 1.93% 0.73% 8.08% 3.58% 6.00% 2.04% 4.45% 5.09% Total energy input 2.60% 8.99% 4.24% 5.10% 6.59% 11.85% 4.73% 6.13% 4.04% 11.87% 6.42% 53 Low carbon finance study (Phase 1 and 2) The World Bank 4.2 South African electricity price and supply conditions The electricity sector in South Africa experienced several demand and supply imbalances since 2007. Towards the end of 2007 the country experienced rolling blackouts and load shedding was implemented across the country to avoid a potential overall nationwide blackout, with a national electricity emergency declared on 24 January 2008. Subsequently, Eskom embarked on a large infrastructure expansion programme aligned with the government’s target of 6% GDP growth between 2010 and 2014. An overview of Eskom load shedding over the past 10 years is provided in Table 8. Table 8: Eskom Load Shedding Schedule 2007-2017 Year Load Shedding Scale South Africa experienced a shortfall and national control had no option but to instruct distribution control centres to implement manual load shedding. Power interruptions began at 08:00 on 18 January 2007 and peaked at 11:00. Eskom restored bulk 2007 supplies by 16:40 as generation units returned to service. Eskom systems allow power Low-Medium interruptions to be spread among customers, resulting in downtime of only two hours each. Many of Eskom’s municipal customers do not have such systems and therefore switch off their entire network, which resulted in longer power outages Unplanned outages leading to load shedding caused major disruptions to all sectors of the economy. Between October 2007 and February 2008 South Africa suffered major 2008 High supply interruptions, as load shedding had to be implemented to manage the energy shortage 2009 None 2010 There has been no load shedding since April 2008 None 2011 None No load shedding despite supply-demand challenges, Eskom continued to avoid load 2012 None shedding in 2011/12, as it has since April 2008 2013 Eskom’s generation fleet met demand requirements without load-shedding in 2012/13. None Eskom declared four power system emergencies on 19 November 2013, on 20 and 2014 21 February 2014 as well as on 6 March 2014. Rotational load shedding was Low-Medium implemented for 14 hours on 6 March 2014 During 2014/15, a substantial number of load reduction events occurred when the available supply was insufficient to meet the demand. Load shedding was 2015 High implemented and/or load curtailment on 34 days between 1 November 2014 and 31 March 2015 2016 Load shedding required on 79 occasions to 8 August 2015 High 2017 No National Rotational Load Shedding None Source: Eskom Annual Reports 2007-2017 Despite continued growth in GDP, production is of electricity is now lower than in 2007 as shown in Figure 44. Since 2011, Eskom has experienced a sharp decline in demand, with Eskom’s sales of electricity declining by 7.4% from 2011 to early 2017 (TIPS, 2017). The decline contrasted with growth of 26% from 2000 to 2007 as well as the strong recovery from the sharp fall during the 2008/9 global financial crisis. Total electricity production, including non-Eskom sources (mostly renewables) fell more slowly, by 3.6% from 2011 to early 2017. That compared to 25% growth from 2000 to 2007 (TIPS, 2017). 54 Low carbon finance study (Phase 1 and 2) The World Bank Figure 44: Indices of GDP in volume terms and annual electricity production, 2000 to 2016 (2000 = 100) Source: (TIPS, 2017) The decline in electricity demand has primarily been driven by: • The effects of the financial crisis and the end of the commodity boom in 2011; and • The diversification of the economy, corresponding with a growth in the services sectors (although this trend predates the fall in electricity supply since 2007); • The closing and relocation of energy-intensive smelting operations • Efforts by business to reduce their dependence on Eskom due to load shedding and price increases. Figure 45: Average price trend for electricity in South Africa (2007-2017) Source: DNA Economics based on Eskom (undated) 55 Low carbon finance study (Phase 1 and 2) The World Bank As shown in Figure 45 and Figure 46, electricity prices were historically low and therefore fairly inelastic as they were a relatively small proportion of a firms operating expenditure. However, since 2008, electricity prices rose steeply with an increase of an average rate of 10.6% per year between 2008/09 and 2013/14. It should also be borne in mind that these prices are for customers supplied directly by Eskom. Customers (including industrial customers) supplied via municipalities typically pay 30-40% more for their electricity. Figure 46: Average increase trend for electricity prices in South Africa (2007-2017) Source: DNA Economics The sharp increase in electricity prices can be attributed to higher coal prices during the commodity boom, efforts to incentivise renewable energy and inefficiencies at Eskom (TIPS, 2017). Subsequently renewables and self-sufficiency among businesses have become more viable for firms given the current environment of rising electricity tariffs and recent history of load shedding and curtailment. The levelised costs of alternative technologies have been declining dramatically over the past few years and are expected to continue falling until 2020. Table 9: Anticipated changes in the levelised cost of electricity, 2013 (R/kWh) Technology 2012 2020 %change Concentrating solar power 2.40 1.71 -29% Coal 0.80 1.69 111% Open cycle gas turbines 6.93 1.63 -76% Wind 0.86 0.76 -12% Photovoltaics 1.79 1.05 -41% Source: (South African Photovoltaic Industry Association, 2013) 56 Low carbon finance study (Phase 1 and 2) The World Bank Table 9 shows the expected price path for electricity generation technologies renewable electricity in 2013. Table 10, however, shows that that renewable energy tariffs have fallen much faster than anticipated. By 2015 wind and PV was significantly cheaper than the previous optimistic price forecasts for 2020, and CSP was very close to the cost predicted for 2020. Although the prices in Table 10 relate to cost of grid scale renewable energy procured under subsequent rounds of the Renewable Energy Independent Power Producers Procurement Programme (REI4P), much of these learnings have translated into smaller scale applications. So, while the costs will be higher due to limited economies of scale in construction and operation, the economies of scale in production that has driven the fall in grid-scale renewable technologies will also be applicable to smaller applications. So, while prices are expected to be somewhat higher, a similar trend in the cost of renewable energy for self-supply is also likely. And for some technologies, like solar PV, prices are expected to be quite similar. Table 10 Average prices per technology (R/kWh) for different REI4P bid windows Technology Bid Window Bid Window Bid Window Bid Window Bid Window Reduction in 1 (2011) 2 (2012) 3 (2013) 3.5 (2014) 4 (2015) price since 2012 CSP 3.55 3.32 1.93 1.8 – -46% Wind 1.51 1.19 0.87 – 0.75 -37% Solar PV 3.65 2.18 1.17 – 0.91 -58% Hydro – 1.36 – – 1.24 -9% Biomass – – 1.65 – 1.61 -2% Landfill Gas – – 1.11 – – N/A Source: (SAPVIA, 2017; IPPP Office, 2017a) 57 Low carbon finance study (Phase 1 and 2) The World Bank 4.3 Sector-level energy and GHG emissions profiles 4.3.1 Summary of all mining An indication of overall energy use in the mining sector (excluding coal mining which is treated separately in the energy balance) in 2014 is shown in Table 11. Table 11: Energy usage in the mining and quarrying sector in South Africa in 2014 % of total Fuel type TJ Bituminous coal 247 0.2% Gas works gas22 249 0.2% LPG 21 0.0% Petrol 568 0.3% Other kerosene 466 0.3% Diesel 57,342 34.9% Electricity 105,562 64.2% Total 164,455 Source: (DoE, 2015) Figure 47 shows the energy balance data as a function of time. The data presented clearly shows the predominance of electricity, bituminous coal and diesel usage in the sector. The drop off in bituminous coal usage between 2009 and 2010 is understood to be a result of a change to how this energy carrier’s consumption was calculated (as this drop is also seen in certain other sectors), rather than being an actual change in activity in the sector. The graph also suggests a slow increase in total diesel usage between 2010 and 2014, although the reason for this increase is unknown. Given that mining output has remained relatively constant over that period, this could also be a data issue rather than representing actual trends. Table 12 shows the GHG emissions from the mining and quarrying sector in 2014, calculated using the energy balance data. Scope 2 emissions (i.e. those associated with grid purchased electricity) clearly dominate the emissions profile in 2014, as expected given the high energy demand in the sector. Diesel represents the only other significant contributor to GHG emissions in 2014. 22Gas works gas is gas supplied by Sasol as a by-product of their processes. The terminology is a remnant from a time when dedicated factories produced gas for distribution from coal. No such factories exist in South Africa any more. 58 Low carbon finance study (Phase 1 and 2) The World Bank Figure 47 Energy balance data in the mining and quarrying sector over time (excl. coal mining) Source: Authors based on (DoE, 2015) Table 12: GHG Emissions from the mining and quarrying sector in South Africa in 2014 GHG emissions (Mtonnes CO2e) % of total Scope 1 4.4 13% Bituminous coal 0.02 Gas works gas 0.01 Petrol 0.04 Other kerosene 0.03 Diesel 4.3 Scope 2 28.4 87% Source: own calculations, based on (DoE, 2015) Figure 48 shows the greenhouse gas emissions profile of the mining and quarrying sector over time, also calculated using the energy balance data shown in Figure 47. The drop in Scope 1 emissions will be linked primarily to the reduction in bituminous coal which was included in the energy balance prior to 2010. 59 Low carbon finance study (Phase 1 and 2) The World Bank Figure 48 GHG emissions profile of the mining and quarrying sector Source: Authors based on (DoE, 2015) Further information on coal mining, precious metals mining and the “other mining” sub-sectors is presented in the following sections, to illustrate how energy demand and emissions profiles differ between mines producing these commodities. 4.3.2 Coal mining The energy balance suggests that the only energy carrier used in coal mining (which is reported separately to all other mining and quarrying) is electricity, with 11,711 TJ of electricity being reported in 2014 (DoE, 2015). However, the picture given by the energy balance is incomplete as diesel is well known to be used extensively in coal mining, particularly in opencast mines23. Table 13: Energy usage by Exxaro in 2015 (coal mining) Fuel type TJ Percent of total Diesel 2,317 53.6% Kerosene 0 0.0% Petrol 4.9 0.1% Aviation gas 0.04 0.0% LPG 0.9 0.0% Gas (assumed natural gas) 1.8 0.0% Electricity 1,999 46.2% Total 4,324 Source: (Exxaro, 2016) 23 GHG emissions from coal mining include those associated with energy use in the extraction, handling, processing and transport of coal, as well as from low temperature oxidation and uncontrolled combustion in mines. Ventilation from underground mines also contributes to the release of methane into the atmosphere, while surface mines have lower methane releases (DEA, 2014). 60 Low carbon finance study (Phase 1 and 2) The World Bank Table 13 presents the fuel and electricity breakdown for Exxaro24. Diesel and electricity usage dominate the energy usage profile, in roughly equal proportions. Table 14 provides an indication of the potential contribution of the coal mining sector to South Africa’s national emissions profile. Fugitive emissions were obtained from the greenhouse gas inventory25. Fuel combustion and electricity emissions were estimated from values presented in coal mining companies’ carbon disclosure project (CDP) responses, scaled up to account for total South African production. The coal mining sector is thus a relatively small contributor to South Africa’s overall inventory. Table 14: Order of magnitude estimate of emissions from coal mining sector in 2014 (Mt CO2e) Percentage contribution to Emissions Coal mining South Africa’s overall emissions Total emissions from sector 6–9 1-2% Scope 1: Fugitive 2.3 1% Scope 1: Fuel combustion 1-2 < 1% Scope 2 3-5 1-2% Source: Authors calculations based on data from DEA, 2014; Exxaro, 2016; Anglo American, 2015b) 4.3.3 Precious metals mining and refining (PGMs and Gold) Selected company level information is available for this sector to show relative contributions of energy carriers to overall demand in this sub-sector. Table 15 shows the fuel and electricity usage for Pan African Resources, a gold and platinum mining company, demonstrating the high dependence on electricity in this sub-sector. Table 15: Energy usage by Pan African Resources (Platinum Group Metals (PGMs) and Gold) Fuel type TJ Percent of total Petrol 3.3 0.3% Diesel 52.1 3.7% Electricity 1,374.2 96% Total 1,429.6 Source: (Pan African Resources, 2015) Table 16 presents the fuel and electricity usage for Anglo American platinum, provided as an indication of the fuel split observed in the platinum sector specifically. Royal Bafokeng 24 Exxaro South Africa reports fuel usage for facilities under operational control as a whole and therefore includes some non- coal mining operations. However, when looking at Exarro’s CDP report, it can be seen that over 99% of their Scope 1 and 2 emissions from operations under their operational control are from coal mines. The figures presented in Table 13 would thus be representative of Exxaro’s coal mines. 25 The South African emission factor for fugitive emissions from coal mining is substantially lower than the IPCC default. South African mines have been shown to have much lower methane contents in their fugitive emission gases. 61 Low carbon finance study (Phase 1 and 2) The World Bank Platinum also provides a breakdown of their energy use, showing electricity accounting for almost 98% of their energy demand (Royal Bafokeng Platinum, 2016). In platinum, the high electricity demand is linked to the refining process. Table 16: Energy usage by Anglo American Platinum in 2015 Fuel type TJ Percent of total Coal Coking coal 66 0.3% Bituminous coal 3,591 14.5% Diesel / Gas 2,545 10.3% Motor gasoline 145 0.6% LPG 12 0.0% Other: Paraffin 20 0.1% Electricity 18,354 74.2% Total 24,732 Source: (Anglo American Platinum, 2016) Sibanye Gold split their energy usage between direct and indirect energy usage, with electricity accounting for 78% of their energy use (Sibanye, 2014). Table 17 provides an indication of the contribution of the precious metal mining sector in South Africa to the country’s overall GHG emissions. The values were calculated from emissions reported by various individual companies, scaled up to account for total South African production. The dominance of Scope 2 emissions aligns with the high contribution of electricity to the overall energy demand in the sector. Table 17: Order of magnitude estimate of emissions from precious metals sector in 2014 (Mt CO2e) Emissions Gold PGM Total emissions from sector 12-17 7-14 Scope 1: Fugitive 2 Unknown Scope 1: Fuel combustion 0.1-0.3 0.8-1.3 Scope 2 9-14 6-13 Source: Authors’ calculations based on data from Gold Fields, 2016; Gold Fields, 2016; Sibanye, 2014; Anglo American Platinum, 2016; Impala Platinum, 2015) 4.3.4 Other Mining The “other” mining sector within South Africa includes numerous other minerals, mined in both underground and surface mining operations. Products include diamonds, iron ore, manganese and chromite. Energy demand profiles differ widely between commodities in the other mining sector. Table 18 and Table 19 provide examples of the range of energy carriers used across these commodities. The fuel and electricity breakdown for Kumba Iron Ore and Assmang iron ores mines is presented in Table 18, while the energy breakdown for the manganese and chromite operations of Assmang is shown in Table 19. Only diesel and electricity data is available for these operations, showing a dominance of diesel in iron ore (which would be expected due to the largely open cast 62 Low carbon finance study (Phase 1 and 2) The World Bank mines used for mining the ore) and electricity in manganese and chromite (potentially attributed to electricity for ore processing). Table 18: Energy usage by Kumba Iron Ore and Assmang iron division during 2015 Fuel type Kumba Iron Ore (TJ) Percent of total Assmang (TJ) Percent of total Diesel 9,754 85% 1,906 70% Electricity 1,770 15% 808 30% Total 11,524 2,715 Source: (Kumba Iron Ore, 2016; Assore, 2016) Table 19: Energy usage by Assmang manganese and chromite divisions in 2015 Percent of Fuel type Manganese (TJ) Percent of total Chromite (TJ) total Diesel 201 35% 247 49% Electricity 381 65% 252 51% Total 581 499 Source: (Assore, 2016) Table 20 provides an indication of the GHG emissions profile from iron ore mining. Also shown are the GHG emissions from mining and quarrying of other commodities not considered separately in this report (i.e. other than coal, gold, PGMs and iron ore). The iron ore fuel and electricity related emissions were calculated from the GHG emissions reported by various companies, scaled up to account for total South African production26. The other mining and quarrying fuel and electricity emissions were calculated from the energy balance data, using Intergovernmental Panel on Climate Change (IPCC) default emission factors for fuel and the country specific electricity emission factor from which emissions associated with gold, PGMs and iron ore is subtracted. Table 20: Order of magnitude estimate of emissions from other mining sector in 2014 (Mt CO2e) Emissions Iron ore Other mining and quarrying Total emissions from sector 1-3 3-15 Scope 1: Fugitive Unknown Unknown Scope 1: Fuel combustion 0.6-1.1 1.7-2.9 Scope 2 0.8-1 2-12 Source: Authors’ ccalculations based on data from Kumba Iron Ore, 2016; Assore, 2016; DoE, 2015 4.3.5 Chemicals The chemicals sector within South Africa produces a wide range of chemicals and is highly integrated with the petroleum refining, coal-to-liquid and gas-to-liquid sectors, as these processes supply many of the raw materials. Hence it is challenging to separate out energy use and emissions in chemicals production from petroleum products. Furthermore, given the relatively small number of players in the sector, data is typically held as confidential (Ecofys and The Green House, 2014; DEA, 2014). 26The split between Scope 1 and Scope 2 emissions is thus different to what it would be if calculated from the energy balance data. 63 Low carbon finance study (Phase 1 and 2) The World Bank However, what data is available is presented here to provide a high-level indication of the energy demand and emissions profile of the sector. Table 21 shows the fuel and electricity data for the chemical and petrochemical sector from the energy balance, which includes petroleum refineries, coal-to-liquid and gas-to-liquid facilities. This energy usage and consequently can only be used to provide an order of magnitude understanding of where energy might be used in the chemicals sector alone. Importantly, more than half of the coal reported in Table 21 would be supplied to Sasol’s CTL facility (see Section 4.3.7). Apart from coal, therefore, natural gas and electricity are important inputs to this sector. Table 21: Indicative energy usage in the chemical and petrochemical sector in South Africa during 2014 Fuel type TJ Percent of total Coal Anthracite 467 0.3% Bituminous coal 60,401 41.0% Gas works gas 5,610 3.8% Natural gas 45,578 31% Electricity 35,119 23.9% Total 147,175 Source: (DoE, 2015) Figure 49 shows the time series data presented in the energy balance. Notable observations here are: • In some years data for certain carriers was not collected • The 2003 to 2005 reduction in bituminous coal would partially be attributed to a partial natural gas feedstock replacement at Sasol (this is reflected in the increase in gasworks gas demand). • The drop in gasworks gas in 2010 is due to a reclassification of this energy carrier as natural gas in that year. The DoE energy balance also reports crude oil and natural gas inputs as feedstocks to refineries in 2014 as 915,290 TJ and 47,397 TJ respectively (i.e. these are additional to the energy inputs which are shown in Table 21). It is recognised that the energy profiles for individual chemicals varies quite significantly, and in addition disaggregating GHG emissions by commodity is not possible with available data. Using the energy balance data shown in Table 21 indicates that fuel and electricity emissions associated with the chemical and petrochemical industry would amount to 8.6 Mt CO2e (3% of SA GHG Inventory Scope 1 emissions) and 9.7 Mt CO2e (4% of SA GHG Inventory Scope 2 emissions) respectively27. This does, however, exclude the process emissions that are substantial for this sector. 27 Calculated using IPCC default emission factor for fuels and the country specific electricity emission factor 64 Low carbon finance study (Phase 1 and 2) The World Bank Figure 49 Energy balance data for the chemical and petrochemical sector over time Source: Authors based on (DoE, 2015) Looking at an alternative data source, the Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014) published a set of order of magnitude GHG emissions estimates for the sector as a whole, shown in Table 22. The fuel combustion figures presented in that study are substantially higher than what was obtained from the energy balance data. It is noted that the majority of the emissions shown are associated with the Sasol CTL/GTL operations, which are considered further in Section 4.3.7. Table 22: Order of magnitude estimate of emissions from chemicals sector in 2014 (Mt CO2e) Emissions Chemicals Total emissions from sector Unknown Scope 1: Process28 >22 Scope 1: Fuel combustion >18 Scope 2 >4 Source: (Ecofys and The Green House, 2014) 4.3.6 Petroleum products The crude oil refinery sector in South Africa converts crude oil into numerous petroleum products, with petrol and diesel being the main products by volume. Crude oil refinery facilities are energy intensive due to the heat and electricity required for processing (Ecofys and The Green House, 2014). 28 Note that this study only presented the lower (>) or upper (<) limit of emissions for a number of sectors 65 Low carbon finance study (Phase 1 and 2) The World Bank Table 23 presents the energy balance data for crude oil refineries. The data suggests that 91% of the energy requirement for refineries is in the form of electricity. Table 23: Indicative energy usage in the crude oil refining sector in South Africa during 2014 Fuel type TJ Percent of total Refinery gas 4,399 9.0% Electricity 44,655 91.0% Total 49,054 Source: (DoE, 2015) It is noted that crude oil refineries locally and globally generate most of their electricity and heat needs through the combustion of waste petroleum products, such as fuel gas, fuel oil and petroleum coke (Bergh, 2012). The values presented in the energy balance includes the self-generated electricity, with grid electricity purchases being substantially lower than this figure (South African Petroleum Industry Association (SAPIA) reports grid electricity purchases for the sector in 2014 to be 3,360 TJ). This observation is reflected when examining the annual reports of individual companies. Table 24 shows the energy breakdown for the Sapref refinery (which accounts for 35% of South Africa’s crude oil refinery capacity and 32% of total crude refinery electrical usage), which indicates energy usage dominated by fuel gas produced in the refining process. Table 24: Energy usage by Sapref in 2014 Fuel type TJ Percent of total Fuel gas 16,508 84.1% Light fuel oil 869 4.4% Electricity 1,126 5.7% Purchased from Eskom 1,066 5.4% Own production 60 0.3% Total 19,628 Source: (Sapref, 2014) Table 25 presents an indication of a breakdown of the emissions from the refining sector. Emissions from crude refineries include those from fuel and electricity usage, as well as fugitive emissions from flaring (Sapref, 2014). Total emissions data from crude refineries is published by SAPIA (SAPIA, 2015). The Scope 2 emissions were calculated here using the reported electrical usage (also reported by SAPIA) and the electricity grid emission factor. The difference between the reported total emissions and the Scope 2 emissions calculated here is a result of including both fuel combustion and fugitive emissions, although the ratio between these emissions is unknown. Comparison of SAPIA data with the Sapref energy usage indicates that the majority of Scope 1 emissions are from the combustion of fuels (Sapref, 2014). 66 Low carbon finance study (Phase 1 and 2) The World Bank Table 25: Order of magnitude estimate of emissions from crude refining sector in 2014 (Mt CO2e) Emissions Crude refining Total emissions from sector <4 Scope 1: Fugitive Small relative to fuel combustion emissions Scope 1: Fuel combustion Majority of the sector’s emissions Scope 2 ~1 Source: (SAPIA, 2015) 4.3.7 Coal-to-liquids and gas-to-liquids CTL and GTL processing facilities both require high energy inputs, in the form of fuels and electricity, to achieve transformations of feedstocks into products. As indicated previously, the processes are closely integrated with the chemical production sector (Ecofys and The Green House, 2014). Furthermore, the CTL and GTL sector is included under the chemical and petrochemical sector in the energy balance and therefore no sector specific information can be obtained from that source. In addition, no disaggregated energy usage data is available at a company level in the public domain. Sasol’s data as presented in annual reports and other publications is too highly aggregated to obtain data relevant to this current study. The only publicly available GHG emissions data is for Sasol Synfuels, which includes their coal gasification and related processes, as well as the supply of steam, electricity, water and effluent treatment for their Secunda petrochemical business. This close integration with the chemical and petrochemical sector means that defining the boundary of which emissions are associated with CTL production is complex and the data cannot be disaggregated using data in the public domain. Therefore, the reported value of 48.3 Mt CO2e Scope 1 emissions from Sasol Synfuels represents emissions from both liquid fuels and chemicals production (Sasol, 2014). Table 26 presents an indication of order of magnitude estimates of emissions from this sector from an alternative source, the Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014). Sasol is a substantial contributor to the emissions profile in South Africa, although a large proportion of their emissions are process emissions that are unavoidable while coal is used as a feedstock. Table 26: Order of magnitude estimate of emissions from CTL and GTL sector (Mt CO2e) Emissions Sasol liquid fuel emissions PetroSA emissions Total <47 >2 Scope 1: Process 24 >1 Scope 1: Fuel <20 <1 Scope 2 >3 <1 Source: (Ecofys and The Green House, 2014) 4.3.8 Cement The cement sector includes the extraction and processing of raw materials, clinker production and cement grinding. Clinker production is the most energy intensive step, due to the fuel requirement 67 Low carbon finance study (Phase 1 and 2) The World Bank for high temperature calcination of the raw material within the kiln. The energy balance only reports aggregated energy usage for the non-metallic minerals sector in South Africa, which includes cement, lime, glass, ceramics and others. Table 27, the energy balance data for non-metallic mineral production, indicates that energy usage in the sector is dominated by coal, natural gas and electrical usage. Natural gas is, however, not used in the cement sector in South Africa and so is attributed to the other products from this sector (lime, glass ceramics). Coal and electricity are thus suggested to be the dominant energy carriers for cement production South Africa. Table 27: Indicative energy usage in the cement sector in South Africa during 2014 Fuel type TJ Percent of total Bituminous coal 34,804 60.0% Gas works gas 368 0.6% Natural gas 15,164 26.2% Electricity 7,628 13.2% Total 57,964 Source: (DoE, 2015) Figure 50 shows energy balance data for the non-metallic minerals sector over time. While the variance in coal data, and particularly the peak in 2009, is assumed to be largely attributed to approaches to collection of data rather than being attributed to any real trends, the coal and electricity dominance as energy carriers are evident. Figure 50 Energy balance data for energy demand in the non-metallic minerals sector over time Source: Authors based on (DoE, 2015) Table 28 presents the fuel and electricity breakdown for PPC’s South African operations (the largest producer in the country). This further demonstrates the dominance of coal and electrical usage. 68 Low carbon finance study (Phase 1 and 2) The World Bank Table 28: Energy usage by PPC (cement producer) in 2014 financial year Fuel type TJ Percent of total Sub bituminous coal 17,945 87.6% Diesel/Gas oil 381 1.9% Motor gasoline 4 0.0% Waste oils 33 0.2% Spent Pot Line - fossil based waste 115 0.6% Electricity 2,003 9.8% Total 20,481 Source: (PPC, 2015) Table 29 provides an indication of the greenhouse gas emissions from the cement sector in South Africa. Apart from GHG emissions associated with energy demand, the calcination stage releases large amounts of carbon dioxide from the raw material and is the main source of process emissions in the cement sector (Ecofys and The Green House, 2014). Process emissions were obtained from the greenhouse gas inventory, while the fuel and electricity emissions were estimated from values presented in cement companies’ CDP responses and annual reports, scaled up to account for total South African production. These values were compared with the estimates presented in the Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014). Table 29: Order of magnitude estimate of emissions from cement sector in 2014 (Mt CO2e) Emissions Cement sector Total emissions from sector 6-9 Scope 1: Process 4.2 Scope 1: Fuel combustion 2-4 Scope 2 0.5-1 Source: (Ecofys and The Green House, 2014; DEA, 2014; PPC, 2015; PPC, 2016) 4.3.9 Iron and steel (including ferro-alloys) The iron and steel sector in South Africa includes both primary (from iron ore) and secondary (from recycled material) production routes. The different production routes have different energy profiles, and are therefore crucial to the understanding of emissions in this sector. A brief overview of the different production techniques is as follows: • Primary production technologies include: o Blast Furnace/Blast Oxygen Furnace (BF/BOF). Anthracite, bituminous coal, coke oven coke and gas are used as the primary inputs. Some of these carriers are used as reductants and some for their energy value. o The Corex/Midrex process which produces direct reduced iron (DRI) that is then fed into an electric arc furnace (EAF) to produce steel. The latter also uses these inputs, but also has high electricity input requirements. 69 Low carbon finance study (Phase 1 and 2) The World Bank • Secondary process routes, which use EAFs to process recycled feedstocks (scrap metal), largely have their energy supplied by electricity from the grid. • Downstream processing is heavily dependent on electricity. Products in the ferroalloy sector are produced in blast furnaces or EAFs using raw materials including ores, reductants and fluxes. Energy carriers are therefore used both to supply energy and as reductants. The electrical demand for the smelting process is also high (Ecofys and The Green House, 2014). The energy balance reports aggregated fuel and electricity usage for the iron and steel sector that includes ferroalloy production. Despite the reservations regarding the quality of the energy balance expressed previously, some idea of the relative use of different energy carriers in these sectors can be obtained from that source. Table 30 presents the energy balance data for the sector. The magnitude of these figures is noted to be strongly linked on the system boundaries that are drawn around energy use – in other words, how far downstream emissions are included. Table 30: Indicative energy usage in the iron and steel and ferroalloys sector in South Africa in 2014 Fuel type TJ Percent of total Coal Anthracite 15,704 6.5% Bituminous coal 73,912 30.4% Coke oven coke 5,643 2.3% Natural gas 10,285 4.2% Gas works gas 7,204 3.0% Coke oven gas 23,666 9.7% Blast furnace gas 23,363 9.6% Electricity 83,332 34.3% Total 243,109 Source: DoE (2015) Figure 51 shows energy balance data in iron and steel and ferroalloys over time. As for mining, it is suggested that the rapid decrease in bituminous coal usage in 2009/2010 is as a result of a change of accounting methodology. It is also suggested that there is a change in the way coke oven coke and coking coal was accounted for in 2009, but it is not clear where this carrier was moved to – some is likely to be included in coke oven gas and some in anthracite. 70 Low carbon finance study (Phase 1 and 2) The World Bank Figure 51 Energy balance data for iron and steel and ferroalloys over time Source: Authors based on (DoE, 2015) Table 31 shows energy demand data for the largest and only primary steel producer, AMSA. The dominance of coal as an energy carrier and reductant is seen here. It is observed that AMSA produced 6% of its consumed electricity in 2015 (AMSA, 2016), which represents only a small proportion of the industry’s total electricity demand. As a primary producer AMSA’s coal usage is higher than those that produce secondary steel (in EAFs), the latter being primarily reliant on electricity for energy. Table 31: Energy usage by AMSA (steel producer) in 2015 Annual total TJ Percent of total Coal Anthracite 1,753 1.4% Bituminous coal 37,832 29.4% Coking coal 72,572 56.4% Natural gas 964 0.7% Oxygen steel furnace gas 2,783 2.2% Liquefied Petroleum gas (LPG) 537 0.4% Diesel/ gas oil 207 0.2% Distillate fuel oil No 1 41 0.0% Total fuel 116,688 Purchased electricity 11,334 8.8% Produced electricity 737 0.6% Total electricity 12,071 Total 128,759 Source: (AMSA, 2016). Table 32 presents the fuel and energy usage for Exxaro’s ferroalloy production, demonstrating the dominance of electricity as the primary energy carrier in this sector. Similarly, Assmang report that 98% of their energy usage for ferroalloy production is electricity (Assore, 2016), while 92% of Merafe-Glencore energy usage for ferroalloy production is electricity (Merafe Resources, 2016). 71 Low carbon finance study (Phase 1 and 2) The World Bank Table 32: Energy usage by Exxaro Ferroalloys in 2016 Fuel type TJ Percent of total Diesel 0.5 1.5% Petrol 0.01 0.0% Other - paraffin, Sasol gas and LP gas 2 6.4% Electricity 28 92.0% Total 31 Source: (Exxaro, 2016) Table 33 presents an indication of the GHG emissions from the iron and steel sector in South Africa. Process emissions data was obtained from the greenhouse gas inventory29. Fuel and electricity emissions were estimated from the Energy Balance data, converted to GHG emissions using IPCC emission factors for fuels and the country specific electricity emission factor – noting once again that this includes data from ferroalloy production. The values presented in the Emissions Intensity Benchmarks for South African Carbon Tax report were also used in determining these ranges (Ecofys and The Green House, 2014). Table 33: Order of magnitude estimate of emissions from iron and steel sector in 2014 (Mt CO2e) Emissions Iron and steel Total emissions from sector 24-65 Scope 1: Process 12-25 Scope 1: Fuel combustion 4-18 Scope 2 8-23 Source: Authors’ calculations based on data from (Ecofys and The Green House, 2014; DoE, 2015) Table 34 provides an estimation of the ranges of emissions from the ferroalloy sector. Emissions values were sourced from the Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014) and calculated from available data. Process emissions were obtained from the GHG inventory. Fuel and electricity emissions were estimated from values presented in companies’ publicly available reports, scaled up to account for total South African production. Table 34: Order of magnitude estimate of emissions from the ferroalloy sector in 2014 (Mt CO2e) Emissions Ferroalloys Total emissions from sector 22-37 Scope 1: Process 11.8 Scope 1: Fuel combustion <1 to >2 Scope 2 10-25 Source: Authors’ calculations based on data from (Ecofys and The Green House, 2014; Assore, 2016; DEA, 2014; Afarak, 2016) 29The greenhouse gas inventory process emissions were based on 2010 production values (14,000 ktonnes across iron and steel). The industry reduced to 12,400 ktonnes by 2014. 72 Low carbon finance study (Phase 1 and 2) The World Bank 4.3.10 Non-ferrous metals The non-ferrous metals sector in South Africa encompasses a large range of products, including aluminium, magnesium, lead and zinc. Primary aluminium is produced from imported aluminium oxide by South 32 through the Hall-Heroult electrolytic process. This processing requires large inputs of electricity30 (DEA, 2014; US EPA, 1996). Lead production occurs via two primary processes, being the sintering and smelting process and the direct smelting process. Both of these processes require high energy inputs and reducing agents (DEA, 2014; IPCC, 2006). Zinc production occurs via three main processes (DEA, 2014; IPCC, 2006), being electro-thermic distillation31, a pyrometallurgical process32, or an electrolytic process33. Table 35 shows the fuel and electricity use in the non-ferrous metals sector as reported in the energy balance. The values demonstrate that energy use in the sector is mostly in the form of coal and electricity. Table 35: Indicative energy usage in the non-ferrous metals sector in South Africa during 2014 Fuel type TJ Percent of total Coal Anthracite 36,118 32.1% Bituminous coal 15,384 13.7% Gas works gas 1,598 1.4% Natural gas 486 0.4% Electricity 59,040 52.4% Total 112,626 Source: (DoE, 2015) Table 36 presents an indication of emissions from the non-ferrous metals sector. Process emissions were obtained from the greenhouse gas inventory for aluminium, lead and zinc production. Fuel and electricity emissions were calculated from the energy balance values, converted to GHG emissions using IPCC emission factors for fuels and the country specific electricity emission factor. 30 Previously both the Prebake and Soderberg processes were used in South Africa, however the closure of facilities means that the only the Prebake process is currently in operation. 31 Roasted concentrate and secondary products are burned to remove impurities before the zinc is reduced in an electric furnace. This process requires fuel as both an energy source and as a reducing agent. 32The Imperial Smelting furnace is used to produce lead and zinc simultaneously through the use of a reducing agent. Fuel is therefore required for both energy and as a reducing agent. 33 Zinc ore is calcined before being leached with sulphuric acid. The zinc is then recovered through electrolysis. This process requires energy for the calcining process, as well as electrical energy for the electrolysis stage 73 Low carbon finance study (Phase 1 and 2) The World Bank Table 36: Order of magnitude estimate of emissions from non-ferrous metals sector in 2014 (Mt CO2e) Emissions Non-ferrous metals Total emissions from sector >23 Scope 1: Process >1 Scope 1: Fuel combustion >5 Scope 2 >16 Source: (own calculations based on data from DMR, 2016; DoE, 2015; DEA, 2014) 4.3.11 Glass The glass sector in South Africa includes the manufacture of flat glass, containers, fibreglass and speciality glass from raw materials, such as sand and limestone, and recycled glass cullet. Energy is required to melt incoming raw and recycled material. The energy balance only reports aggregated energy usage for the non-metallic minerals sector, as discussed in Section 4.3.8, and little further can thus be said about energy demand for glass production. The energy balance data suggests that the energy usage for non-metallic mineral production is dominated by coal, natural gas and electrical usage. From publicly available data it is suggested that natural gas usage is proportionally higher in the glass sub-sector as compared to other commodities in the non-metallic minerals sector. Table 37 presents an indication of the greenhouse gas emissions from the glass sector in South Africa.34 Table 37: Order of magnitude estimate of emissions from glass sector in 2014 (Mt CO2e) Emissions Glass Total emissions from sector <5 Scope 1: Process <1 Scope 1: Fuel combustion <3 Scope 2 <1 Source: (DEA, 2014; DoE, 2015) 4.3.12 Pulp and paper The pulp and paper industry in South Africa involves the manufacture of pulp from both virgin and recycled material and the subsequent conversion of this pulp into various paper and cardboard products 34 Process emissions were obtained from the greenhouse gas inventory. The fuel and electricity emissions for the non- metallic minerals sector were calculated from the energy balance, and then converted to GHG emissions using IPCC emission factors for fuels and the country specific electricity emission factor. The estimated greenhouse gas emissions for the “other” non-metallic minerals sector were then determined by subtracting the estimated greenhouse gas emissions for the cement sector from these calculated emissions. It is noted that these emissions will include all other non-metallic minerals, including glass and lime. 74 Low carbon finance study (Phase 1 and 2) The World Bank The energy requirement for pulp and paper production varies depending on the type and grade of product produced and ancillary activities, such as steam generation, wood handling, water treatment and conversion processes, happening onsite (Ecofys and The Green House, 2014). The large range of products produced using different processes makes generalisation difficult within this sector.35 Reports suggest that a significant portion of the energy required is supplied by the burning of waste materials (SAPPI, 2016; Mondi, 2013). Table 38 shows the energy balance reports of fuel and electricity usage for the pulp and paper sector. The energy usage is dominated by gas works gas and electricity, although this excludes energy from waste materials. Table 38: Indicative energy usage in the pulp, paper and print sector in South Africa in 2014 Fuel type TJ Percent of total Gas works gas 3,683 39.1% Natural gas 756 8.0% Electricity 4,988 52.9% Total 9,428 Source: (DoE, 2015) Figure 52 shows energy balance data over time. No clear explanation for the trends could be found, with some of the variability likely to be linked to data quality. Natural gas data was only included in the balance from 2010. No breakdown of energy usage by company is available in the public domain for South African operations. However, SAPPI Southern Africa emissions data suggests that close to 90% of energy is obtained from the burning of fossil fuels, with only 10% supplied by grid electricity (SAPPI, 2016). Similarly, back calculation of the South African Mondi emissions suggests that approximately 80% of Mondi’s energy usage is supplied by fossil fuels (Mondi, 2013). This is clearly in contradiction to the energy balance data shown above. The reason for the discrepancy is unknown, but could possibly relate to how biomass is accounted for, or alternatively to the impact of energy usage in the print sector on overall demand for the sector. 35 . The following products are manufactured in South Africa: • Pulp (Chemical pulp, Dissolving pulp, Mechanical pulp, Semi-chemical pulp) • Printing and writing paper • Packaging paper and cardboard • issue paper 75 Low carbon finance study (Phase 1 and 2) The World Bank Figure 52 Energy balance data for the paper, pulp and print sector over time Source: Authors based on (DoE, 2015) Table 39 presents an indication of pulp and paper sector related emissions in South Africa. Emissions values were sourced from the Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014) and calculated from available data. As per the IPCC guidelines, there are no process emissions associated with the pulp and paper sector. Fuel and electricity emissions were calculated from the energy balance values, converted to GHG emissions using IPCC emission factors for fuels and the country specific electricity emission factor. These were compared with company reported emission values, scaled up to account for total South African production. Table 39: Order of magnitude estimate of emissions from pulp and paper sector in 2014 (Mt CO2e) Emissions Pulp and paper Total emissions from sector 1–8 Scope 1: Process 0 Scope 1: Fuel combustion <1 - 6 Scope 2 1-2 Source: (own calculations based on data from SAPPI, 2016; Ecofys and The Green House, 2014; DoE, 2015) 76 Low carbon finance study (Phase 1 and 2) The World Bank 5 FINANCING LOW CARBON INVESTMENTS 5.1 South Africa’s financial sector South Africa has a well-developed domestic finance market, made up of a wide range of stakeholders, including institutional investors (savings, retirement and insurance industries) and the banking (monetary) sector (which includes various national and sub-national development finance institutions. As summarised in Figure 53, South African institutional and other non-banking finance institutions held in excess of R 8.5 trillion worth of assets in 2016, across insurers, private retirement funds and the Public Investment Corporation (PIC). These assets were allocated to both equity- based and other financing instruments. Figure 53: Assets in non-bank financial institutions, 2016 (R billion) 10,000 9,000 8,000 Other assets^, 809 Loans, 451 7,000 Other*, 2,962 6,000 R billions 5,000 Shares and other PIC, 1,887 equity, 4,806 4,000 Private retirement 3,000 funds, 993 2,000 Insurers, 2,770 Fixed-interest 1,000 securities, 2,546 0 By institution By classification Source: Based on data from South African Reserve Bank *Other reflects participation bond schemes, finance companies, trust companies, unit trust investments and public sector retirement funds not managed by the PIC. ^Other assets includes cash and deposits, financial derivatives and non-financial assets. Similarly, South Africa’s formal banking market can be considered equally deep. As reflected in Figure 54 domestic credit extended by South Africa’s monetary sector (primarily the formal banking institutions) totalled more than R3.5 trillion by the end of 2016. More than 51% of this credit was extended to the business sector (companies). 77 Low carbon finance study (Phase 1 and 2) The World Bank Figure 54: Domestic credit extended by South African monetary sector, 2016 (R billion) 3,500 Government sector, 184 3,000 R billions 2,500 Companies, 1,766 2,000 1,500 1,000 Households, 1,486 500 0 Source: Based on data from South African Reserve Bank The monetary sector consolidates amongst others the South African Reserve Bank, private banking institutions (including mutual banks and building societies), the Land Bank and Postbank. In addition to these sources of finance, the South African government also aims to incentivise investment activity through a range of fiscal instruments and through a number of development finance institutions (DFIs). Further investment and financing is undertaken by a range of international DFIs, multilateral institutions and donors. 5.2 Providers of low carbon finance in South Africa36 South Africa’s financial market can be considered deep and relatively well resourced. However, it is especially difficult to determine the portion of funding that is allocated specifically to ‘low carbon’ activities, or to green / sustainable investments more generally. This is due to a number of factors, discussed further in Box 7. This section therefore aims to provide a snapshot of the potential providers of funding for low carbon investment in South Africa, and an indication of the breadth of sources for low carbon funding in South Africa. Given the evolving nature of this market, and the fact that it is very difficult to distinguish ‘low carbon’ from other types of funding at present in South Africa, no attempt is made to quantify the size of the pool of funding available. 36 This section builds on an earlier analysis of the market for low emissions development projects in South Africa undertaken by DNA Economics for the USAID-funded South African Low Emissions Development (SA-LED) Program (See (Cloete, et al., 2016)). 78 Low carbon finance study (Phase 1 and 2) The World Bank Box 7: Green / climate finance in South Africa Providing a quantum for the level of investment in low carbon projects in South Africa is especially difficult. This is due in part to the fact that no globally agreed definition on green or climate finance currently exists. International definitions of ‘green’ tend to be either very general and open ended or highly targeted and narrow. For example, the World Trade Organisation (WTO) is working on a proposal to develop a detailed and specific product level list of goods that can be classified as ‘environmental’. Conversely, the International Capital Markets Association has a very broad definition of projects that could be classified for investment through green bonds. Similarly, in the South African context, no clear definition for “low carbon” or “green” investment currently exists. For many investment activities, the reduction of carbon emissions is often one of multiple objectives, and this makes it particularly difficult to apportion or assign such investments into any one objective category. At the same time, financing institutions may not necessarily have dedicated the resources necessary or established systems to effectively monitor finance flows into mitigation / low carbon projects. This may be especially true where multiple divisions are responsible for the provision of different funding instruments to clients. From an ‘investment’ point of view, low carbon projects and are often evaluated using the same principles as standard / typical investment projects. This contributes to the lack of distinction made by funders between general investments and low carbon investments. As a result, there is little ‘marking’ or ‘ring-fencing’ of investments and financing dedicated to low carbon initiatives, beyond renewable energy. Finally, the splitting of energy and climate policymaking and leadership across various public sector entities make it difficult to determine and articulate how green and climate-related investment should be defined, categorised and monitored. The absence of clear definitions for green and climate-related investment and finance at a policy level further diminishes the ability of stakeholders to effectively determine how much finance has been dedicated to climate and green investment activities. Providers of low carbon finance in South Africa can be grouped into three broad categories: • Private sector finance market (incorporating companies’ own / internal financing, finance from commercial and investment banks, as well as other private sector funds); • DFIs and donor-related funds and funding pools; and • Public sector incentives, instruments and programmes supporting investment. Given that the study attempts to identify issues that can help to balance the demand and supply of finance for low carbon investment, the analysis of the carbon finance market focuses on funding for investments. Research and development funding thus does not form part of the review. More detail on the identified sources, including an exhaustive list of funders, investors and instruments, is provided in Appendix 5. 5.2.1 Private sector The private sector finance market can include (in addition to firms’ own retained profits and internal funding) project funders, developers, developer partners and technology providers / component manufacturers. Project funders include traditional banks; asset, retirement and pension fund 79 Low carbon finance study (Phase 1 and 2) The World Bank managers; private equity investors and venture capitalists. Funding is generally provided in the form of loans and equity investments (for more on the funding instruments, see section 5.3). Other private sector funders could include, for example, project developers and technology and service providers (advisors) that can assist across the various project development phases. There are a number of private sector associations organised around specific technologies and sectors. These organisations tend to provide information and facilitation support services and, especially in the case of the energy industry associations, lobbying on behalf of their members. Private sector finance markets can also include non-traditional foundation donors, such as the Bill and Melinda Gates Foundation which provide grants and donor funding. There are at least 20 large institutions (banks and asset managers) that have been identified as providing finance for green initiatives and, in total, more than 80 private sector funders were identified. These institutions provide finance either through specific lines of credit or through dedicated units and products. 5.2.2 Public (government) sector incentives and programmes There are number of grant and tax incentives available to support investment in general. Many of the grant-based incentives do not focus specifically on low carbon or green investment, but can be utilised for such projects. The tax incentives are often more specific, with some of these tax instruments specifically dedicated to renewable energy projects. Incentive and grant funding programmes Incentive and grant funding programmes related to investment are mainly administered by the DTI. The DTI provides financial support to qualifying companies in various sectors of the economy for various economic activities, including manufacturing, business competitiveness, export development and market access, as well as foreign direct investment. DTI incentive schemes primarily target greenfield and brownfield investment across a range of sectors (including those outside of the ‘heavy industry’ sectors. However, few of these incentives directly target low-carbon investment, and are more general in nature. The incentives identified are elaborated on in Appendix 5. Tax allowances and exemptions There are several tax allowances and exemptions offered to firms, primarily administered by the DTI, National Treasury and the DST. Some of these incentives are to incentivise investment in general, including for example, the tax incentive for greenfield and brownfield investment (12I Tax Incentive), which may include low carbon investment. Other incentives are more focused on renewable energy and low carbon initiatives, including: • A capital allowance for movable assets used in the production of renewable energy (12B Tax Incentive), • A tax exemption on the disposal of certified emission reduction (CER) credits (12K Tax Exemption) 80 Low carbon finance study (Phase 1 and 2) The World Bank • An allowance for businesses implementing energy efficiency savings (12L Tax Incentive), and • Tax deductions for infrastructure expenditure in renewable energy projects (12U Tax Incentive). Eskom demand side management funds Until recently Eskom offered a number of energy efficiency, load shifting (moving electricity usage to outside of Eskom’s peak demand times) and demand side management and demand response programmes aimed at residential, commercial and industrial users. In 2014, however, most of these programmes were put on hold due to financial constraints. The programmes were restarted in 2015 with a focus on residential lighting projects and larger industrial projects funded via an ESCO model (ESKOM, 2016; ESKOM, 2014). There is significant uncertainty regarding the future funding of low carbon activities that reduce energy demand by Eskom, as the utility is currently believed to be in serious financial difficulties at a time when it has significant excess generation capacity while also investing heavily in new generation capacity, and is also believed to be offering special pricing deals to heavy industrial users in an attempt to increase electricity sales (Van Staden, 2018; Rycroft, 2017; Slabbert, 2017a). 5.2.3 DFI and donor related funds DFI International/ development agencies provide a range of technical assistance and financial support. Funding is mostly in the form of grants and concessional funding for governments, and debt and mezzanine finance for the private sector. DFIs making funds available to the private sector sometimes do so via subsidiaries dedicated to private investment. France, Germany, multilateral funds (the Clean Technology Fund and the GEF) and Australia were identified as the key donor sources of climate finance in South Africa as of 2013 (Montmasson-Clair, 2013). Many of the development agencies do not explicitly mention low carbon activities (or related terms such as greenhouse gases, renewable energy, etc.), but do provide support (business support, facilitation, incentives and loans), mostly to businesses that could include those involved in the low carbon market. From a DFI perspective, the organisations which have historically provided green funding in South Africa include the Development Bank of South Africa (DBSA), IDC and the International Finance Corporation (IFC). The DBSA administers and manages a number of project preparation and infrastructure investment funds, and has also historically been responsible for the management of the DEA-funded Green Fund. The Green Fund is a national fund that specifically supports green initiatives that assist South Africa’s transition to a low carbon, resource efficient and climate resilient development path. To date, the fund has received approximately R1 billion in public funding, which has been allocated to a range of co-funded projects. However, the future of the Green Fund (including its administration, management and disbursement activities) is currently uncertain. 81 Low carbon finance study (Phase 1 and 2) The World Bank The DBSA is also expected to undertake the management and administration of the UNFCCC’s Green Climate Fund (GCF) for South Africa. This fund is set to become one of the biggest potential donor sources of financing for low carbon projects. However, the related processes and project qualification criteria are still uncertain. The IDC, owned by the South African Government and mandated to develop domestic industrial capacity, is a key implementing agency of industrial policy. As part of this focus, the IDC has set a target of providing R5 Billion of funding to renewable energy projects per year for five years (a cumulative target investment of R25 billion), and has also taken the decision to focus on small renewable projects in future. The IFC focuses on helping the private sector address climate change through investments and innovative financing, and by addressing regulatory and policy obstacles to green growth. It acts as a catalyst to address climate change by finding ways to unlock private capital for climate-smart projects and help finance the development of innovative technologies, therefore encouraging a shift toward energy efficiency and renewable energy. In some cases, private sector banks have collaborated with public sector and donor institutions in an effort to provide finance for green investment at concessional rates. This includes, for example, the Green Credit Line extended by the Agence Française de Développement (AFD) and taken up by ABSA, IDC and Nedbank. The overall credit facility was EUR 120 million targeting renewable energy and energy efficiency projects. The credit facility aimed to provide concessional funding by embedding a grant component into the loan that could be utilised to lower the cost of finance, finance technical assistance and training or to support the design and marketing of the loan instrument. 5.2.4 Summary There is a wide range of sources available for firms wishing to access finance. However, it is also clear that few of these sources explicitly target ‘low carbon’ investments. This is especially true of the instruments and programmes provided by the public sector, which focuses on supporting investment in general, or into specific sectors of the economy. Thus, while it may be evident that there is adequate supply of finance for investment activities, it may also be a case that targeting of low carbon investments, which may have peculiar features, is inadequate or may not be targeted by the right type of instruments. Some of these issues are addressed in more detail in Section 7. A list of possible low carbon support mechanisms where included the discussion guides used to facilitate stakeholder engagement sessions and focus groups. As these guides were shared with stakeholders prior to engagement sessions, it was hoped that this would assist to remind stakeholders of mechanisms with which they may engaged in the past, including ones they did not pursue further. The list is shown in Box 8. 82 Low carbon finance study (Phase 1 and 2) The World Bank Box 8 Possible low carbon support mechanisms included in stakeholder engagement discussion guides The instruments included in the discussion guides were as follows: • Capital Projects Feasibility Programme (CPFP) • Carbon Credits from CDM or any other source (including voluntary markets) • Concessionary finance provided via commercial or investment banks • Energy Efficiency Tax Incentive (Section 12 L of Income Tax Act) • Eskom Demand Side Management (DSM) funding [when it was available] • Export Marketing and Investment Assistance Scheme (EMIA) • Foreign Investment Grant (FIG) for qualifying foreign investors • Funding from IDC • Manufacturing Competitiveness Enhancement Programme (MCEP) • Renewable Energy (accelerated depreciation) tax incentive (Section 11 and 12B of Income Tax Act) • Section 12 I: Tax Allowance Incentive (Section 12I of Income Tax Act) for large-scale Greenfield investments and expansion of Brownfield investments in priority sectors identified in the Industrial Policy Action Plan (IPAP) • Support Programme for Industrial Innovation (SPII) • Support provided under the Special Economic Zones Act • Tax exemption for income from CERs (Section 12 K of Income Tax Act) • Technology and Human Resource for Industry Programme (THRIP) • REI4P or REI4P small scale • IPP Co-gen programme • Critical Infrastructure Programme (CIP) • R&D tax incentive 5.3 Mechanisms and instruments South Africa’s industrial firms have utilised both internal and external investment (own funds) to finance low carbon initiatives. Internal funding is often utilised where such investments can be incorporated into operating budgets and will result in cost saving and efficiency gains. Where firms are unable to finance such investments internally, there are various instruments and mechanisms that a firm could utilise to access funding. These methods are discussed in more detail below. 5.3.1 On- and off-balance sheet financing A key determinant of how the project will be funded is whether the project can be funded on- or off- balance sheet. Firms that are highly leveraged (where the level of debt is high relative to the level of equity) often favour access finance for investment in a manner that does not impact on their overall levels of balance sheet debt. Such finance could take on various forms, but is typically generalised as project finance (i.e. financing and investment is sourced and ring-fenced for a specific project). This is often done through the creation of a special purpose vehicle (SPV) that ring-fences and house that projects assets, liabilities, revenues and costs. 83 Low carbon finance study (Phase 1 and 2) The World Bank By contrast, through on-balance sheet finance funders directly invest in the firm (through debt or equity), with the firm able to utilise this funding for general or restricted purposes. The key difference between on- and off-balance sheet funding lies in the associated risk and right of recourse for the funder. Where finance is provided through on-balance sheet funding, lenders have recourse to the borrowing firm’s entire asset and operating cash flow base. For project-finance based investing, lenders and investors generally have limited recourse only to the cash flows and assets of a specific asset. The key defining characteristics of project finance and on-balance sheet lending are summarised in Table 40. Table 40: On-balance sheet vs. project-based financing Characteristic On-balance sheet financing Project-based financing Recourse limited to cash flows and assets of Debt servicing Generally have recourse to borrowing firm’s project being financed, through the creation of and recourse assets and cash flows. a SPV. On-balance sheet lending is typically of a Term structure shorter term and can generally be sourced at a Cost of financing will be directly related to and cost of cost directly related to the borrowing firm’s expected cash flows for the project. financing credit and operating risk profile. Project based finance can be complex to structure and arrange given the role players and stakeholders that may be involved in the Financing can be structured and arranged transaction. relatively quickly between the financier and the Related to this, project-based finance Structuring and investee. transactions costs are generally higher. transaction costs Transaction costs are comparatively lower for Financiers may also more closely evaluate on-balance sheet lending. project-based financing given that they only have recourse to that project’s assets and cash flows. This may result in lower default rates for project-based finance. Suitable for smaller projects, where financing Can be utilised for any size project but suitable Size of projects to sourced does not materially impact on firm’s for larger projects given relatively higher be financed debt-equity structure. transaction and structuring costs. (Gardner & Wright, 2012), (Switala, n.d.) 5.3.2 Finance instruments utilised Figure 55 provides a summary of the types of instruments that could be utilised for financing low carbon activities. Discussions with industry and financial stakeholders suggest that, as illustrated in Figure 55, there are a wide range of instruments available, restricted only by the choice of financier and company-specific objectives. 84 Low carbon finance study (Phase 1 and 2) The World Bank Figure 55: Financing instruments available for low carbon investments Modes Finance instruments Market vehicles Corporate Asset category Instrument Project-based balance sheet / Capital pool other Project bonds Corporate bonds, Green bonds Municipal, Sub- Bond indices, Bonds sovereign bonds Bond funds, ETFs Subordinated Green bonds bonds Fixed income Direct/Co- investment lending Debt Funds (GPs) to corporate Direct/Co- Syndicated loans, investment lending Securitized loans Loans to project, (asset backed Syndicated project Loan Indices, Loan securities (ABS)), loans Funds Collateralised Loan Obligations (CLOs) Subordinated Subordinated Mezzanine Debt bonds, Convertible Mixed Hybrid loans/bonds, Funds (GPs), bonds, Preferred Mezzanine finance Hybrid Debt Funds stock Listed Listed stocks, Infrastructure Listed YieldCos Closed-end Funds, Equity Funds, REITs, IITs, MLPs Indices, trusts, ETFs Equity Direct/Co- Direct/Co- Investment in Unlisted Investment in Unlisted infrastructure infrastructure infrastructure project equity, funds corporate equity PPP Source: Adapted from (OECD, 2015) However, these stakeholders note that the most common methods of financing such activities in South Africa has been through direct loan or mixed financing, either on a project-based or balance sheet basis. It also appears that direct equity investment is also being used as a financing instrument, but is primarily utilised by institutions beyond the traditional banking sector.37 The utilisation of green bonds is seen by some stakeholders as an increasingly attractive option for investment in the green economy. More on South Africa’s green bond market is provided in Box 9. 37 A number of corporate banks have noted that increased, more stringent regulatory liquidity requirements has resulted in increased funding costs for equity investments when compared to loan financing. As a result, South African banks are increasingly separating that equity investment businesses from their banking divisions or are ceasing to undertake equity investing. 85 Low carbon finance study (Phase 1 and 2) The World Bank Box 9: Green bonds in South Africa South Africa’s first green bond was listed on the JSE and issued by the City of Johannesburg in 2014. Since this first listing a further three issuers have listed green bonds on the exchange, the IFC, the IDC and the City of Cape Town. The low level of domestic issuances and listing of green bonds, despite a strong international uptake in these instruments, has partly been attributed to the lack of listing requirements for green bonds. As noted in discussions with both the JSE and other financial sector stakeholders, historic issuances of green bonds in South Africa have been done in a regulatory vacuum. This effectively allowed entities to issue and list green bonds without having to validate and verify that the proceeds from these bonds were actually being utilised and invested in green projects. In response to this need the JSE has developed listing requirements for green bonds, gazetted for public comment in July 2017 and expected to be implemented from the third quarter of 2017. The listing requirements aim to be flexible while at the same time aiming to provide investors with increased certainty that funds generated through the issue of green boards are invested in ‘green’ sectors. The JSE has used the Green Bond principles governed by the International Capital Markets Association as the minimum standard for compliance by green bond issuers. The focus of listing requirements aims to ensure that bond proceeds explicitly target green projects; there is external review of use of proceeds and that there is ongoing disclosure of compliance. It is anticipated by the JSE that once listing requirements are finalised, there will be a marked increase in the demand for (and supply of) green bonds in the South African market. 5.3.3 The role of Energy Services Companies (ESCOs) Both the providers and users of finance have noted a preference for the utilisation of energy service companies (ESCOs) and project ‘developers’ to act as the holder of low carbon assets and provider of services to industrial firms. ESCOs and related developers provide a range of energy services to companies, including energy audits, the supply and maintenance of capital and operational equipment for energy generation and saving, and energy efficiency and monitoring services.38 ESCOs are also increasingly seen as ideal vehicles to provide off-grid energy to industrial firms. The key characteristics of the primary revenue models utilised by ESCOs is summarised in Figure 56. 38 (van Tonder, n.d.) 86 Low carbon finance study (Phase 1 and 2) The World Bank Figure 56: ESCO revenue and operating models Shared savings model Guaranteed savings model Arrange financing FINANCIAL INSTITUTION FINANCIAL INSTITUTION Loan Repayment with funds based Loan Repayment from portion on savings guarantee from of savings share ESCO Project Project development, development and financing and implementation implementation END USER Payment for ESCO ESCO END USER services Payment based on savings share Savings guarantee Key characteristics • Performance related to cost of energy saved • Performance related to level of energy saved • Value of payment is linked to energy price • Value of energy saved is guaranteed to meet debt service obligation down to floor price • ESCO carries performance and credit risk as it • ESCO carries performance risk and energy – typically carries out the financing user/customer carries credit risk • Usually off balance sheet of energy user/customer • If the energy-user/customer borrows, then the debt appears on the balance sheet • Can serve customers that do not have access to • Requires creditworthy customer financing, but still requires a creditworthy customer • Extensive measurement and verification (M&V) • Extensive measurement and verification (M&V) • Favours large ESCOs, small ESCOs become too • ESCO can do more projects without getting highly leveraged to do more projects geared • Favours projects with short payback due to higher • More comprehensive project scope due to lower financing costs financing Source: (van Tonder, n.d.) Utilising ESCOs allows both the corporate firm and the financing entity to reduce the risk and exposure to low carbon investments. This is especially through a shared savings model where the ESCO undertakes responsibility for holding the financed assets, provides income and cash flow certainty for these assets and provides the necessary maintenance and operating services that may be required. In this sense, can ESCOs effectively provide the SPV for energy efficiency projects on a pooled basis. In addition, ESCOs are able to provide revenue streams for ‘cost-saving’ investments that a firm wishes to undertake. Consultations with the financial sector suggest that this ability to provide some revenue certainty from a company’s cost savings measures can attractive. This is especially when compared to relying on a firm to repay any funding (and the cost of this funding) provided through any cost savings that is achieved from related investments. While there a few large international ESCOs operating in South Africa, few examples of investments in ESCOs by local financial sector firms were found during the literature review. None of the financial 87 Low carbon finance study (Phase 1 and 2) The World Bank sector stakeholders consulted had significant investments in local ESCOS, or were planning to invest in local ESCOs. Yet opportunities do seem to exist in this area. PowerX, the only entity in South Africa licensed to purchase low carbon power from generators, wheel it across the grid, and sell it on to end users, is part of a larger group of companies (Clean Energy Africa) that invests in renewable energy projects (CEA, n.d.; PowerX, n.d.). Investment firm PSG Group invested in a local ESCO, Energy Partners, in 2012, and has since gained a controlling stake in the company (PSG Group, 2013). In 2015, PSG stated that it believed Energy Partners would be able to increase its revenue and profit after tax from R50 million and R4m in 2014 to R800 million and R140 million by 2020 (Planting, 2015). In 2016, PSG revised their expectations upwards, indicating that it was aiming to develop Energy Partners into the largest private energy company in South Africa with assets of more than R10 billion and a profit after tax in excess of R500 million by 2021 or 2022 (Hasenfuss, 2016). 6 POTENTIAL LOW CARBON INVESTMENT OPTIONS 6.1 Introduction Based on the findings of the study presented thus far, various reference sources including the open literature, company reports, the Mitigation Potential Analysis and the authors’ own experience, this section now turns to identifying the potential low carbon investment options available to each of the target sectors of this study, and then identifying which of these are potentially suitable for external financing. The identified low carbon investment options were updated and adapted based on stakeholder input to create a realistic picture of the options available to entities within the short term. Factors influencing attractiveness of options were discussed in Box 2 The remainder of this section focusses on the low carbon investment options available in the individual sectors, whereas Section 7 deals with the gaps and barriers that prevent these options from being implemented. 6.2 Mining Depending on the commodity, the mine configuration (opencast versus underground) and processing steps, energy demand is dominated by electricity and/or fuel use, with the latter primarily being diesel. The range of low carbon investment options is thus dominated by options which focus on these two energy carriers. 6.2.1 Coal mining The table below provides an overview of potential low carbon investment options available to the South African coal mining sector. 88 Low carbon finance study (Phase 1 and 2) The World Bank Table 41 Low carbon investment options in coal mining Indicative payback Currently Attractive Scale of period Description of low Type of implement-able for external investment (years) or carbon investments investment in South finance (Rm) indicative Africa cost (R/tCO2e) Improve energy efficiency of mine haul Energy Yes Yes >1,000 6-10 years and transport operations efficiency - capex Onsite clean power Electricity Yes Yes >1,000 > 10 years generation - CSP generation Optimise existing electric No - but Energy motor systems (controls could be Yes <50 3-6 years efficiency and VSDs) bundled Process, demand & No - but Energy energy management could be Yes <50 Unclear efficiency system. bundled No - but Energy Energy efficient lighting could be Yes <50 Unclear efficiency bundled Widely Improve energy implemented/ efficiency of mine haul Energy No Limited 50-100 3-6 years and transport operations efficiency opportunities - opex remaining Install energy efficient Energy No No39 100-500 6-10 years electric motor systems efficiency Use of 1st generation biodiesel (B5) for Fuel switch No40 Unclear 50-100 Unclear transport and handling equipment Use of 2nd generation biodiesel (B50) for Fuel switch No No transport and handling equipment Use of 2nd generation biodiesel (B100) for Fuel switch No No transport and handling equipment Coal mine methane recovery and utilisation Electricity No No 50-100 6-10 years for power and/or heat generation generation Coal mine methane GHG <40 recovery and destruction emissions No No <50 R/tCO2e by flaring abatement 39 Only feasible for greenfield project or major refurbishment. 40 Not proven at scale yet. Only really feasible as part of end of mine rehabilitation and with crops that do not require irrigation. 89 Low carbon finance study (Phase 1 and 2) The World Bank 6.2.2 Gold and platinum mining The table below provides an overview of the low carbon investment options available to the South African gold and platinum mining sectors. Table 42 Low carbon investment options in gold and platinum mining Indicative payback Attractive Currently Scale of period Description of low Type of for implement-able investment (years) or carbon investments investment external in South (Rm) indicative finance Africa cost (R/tCO2e) Install energy efficient Energy Yes Yes >1,000 <3 years electric motor systems41 efficiency Onsite clean power Electricity Yes Yes >1,000 Unclear generation - PV generation Improve energy efficiency of mine haul Energy Yes Yes >1,000 6-10 years and transport operations efficiency - capex Onsite clean power Electricity Yes Yes >1,000 > 10 years generation - CSP generation Electricity Cogeneration42 Yes Yes 100-500 6-10 years generation Optimise existing electric No - but Energy motor systems (controls could be Yes <50 3-6 years efficiency and VSDs)43 bundled Process, demand & No - but Energy energy management could be Yes <50 Unclear efficiency system bundled No - but Energy Energy efficient lighting could be Yes <50 Unclear efficiency bundled Use of 1st generation biodiesel (B5) for Fuel switch No Unclear 50-100 Unclear transport and handling equipment Use of 2nd generation biodiesel (B50) for Fuel switch No No transport and handling equipment Use of 2nd generation biodiesel (B100) for Fuel switch No No transport and handling equipment 41 A stakeholder felt this was not a realistic option as it would only be done during expansion or major refurbishment of mine. It was also mentioned that the capital cost was lower at R100-R500 million and the payback is much longer at 6-10 years. 42 A stakeholder provided an investment estimate of R500m - R1bn with a payback of more than 10 years. 43 A stakeholder indicated the investment cost was R100-R500 million and that it had a payback of less than 3 years. The stakeholder, however, also mentioned it would be funded out of operational expenditure, and thus the operational payback would not be tracked. 90 Low carbon finance study (Phase 1 and 2) The World Bank Indicative payback Attractive Currently Scale of period Description of low Type of for implement-able investment (years) or carbon investments investment external in South (Rm) indicative finance Africa cost (R/tCO2e) Onsite clean power generation - smaller Electricity No Unclear <50 <3 years options (mini hydro and generation air/water turbines)44 Widely Improve energy implemented/ efficiency of mine haul Energy No Limited 100-500 <3 years and transport operations efficiency opportunities - opex remaining 6.2.3 “Other” mining The table below provides an overview of the low carbon investment options available to the other mining sector in South African, with particular relevance to the iron ore industry. Table 43 Low carbon investment options in iron ore mining Indicative payback Currently Attractive Scale of period Description of low Type of implement-able for external investment (years) or carbon investments investment in South finance (Rm) indicative Africa cost (R/tCO2e) Improve energy efficiency Energy of mine haul and transport Yes Yes 50-100 3-6 years efficiency operations Onsite clean power Electricity Yes Yes >1,000 > 10 years generation generation Use of 1st generation <40 biodiesel (B5) for transport Fuel switch Yes Yes 50-100 R/tCO2e and handling equipment Switching from diesel to electric haulage with Fuel switch Yes Yes Unclear Unclear overhead lines. No - but Process, demand & energy Energy could be Yes <50 Unclear management system efficiency bundled No - but Energy Energy efficient lighting could be Yes <50 Unclear efficiency bundled 44 Stakeholders at focus group indicated they are still exploring small power generating devices in pipes, air lines etc. that can charge stations underground. It is possible that they may be able to roll this out within the next 3 years, but there is still a lot of uncertainty. 91 Low carbon finance study (Phase 1 and 2) The World Bank Indicative payback Currently Attractive Scale of period Description of low Type of implement-able for external investment (years) or carbon investments investment in South finance (Rm) indicative Africa cost (R/tCO2e) Widely Optimise existing electric implemented/ Energy motor systems (controls No Limited 100-500 <3 years efficiency and VSDs) opportunities remaining Widely implemented/ Install energy efficient Energy No Limited >1,000 <3 years electric motor systems efficiency opportunities remaining Electricity Cogeneration45 No No generation Use of 2nd generation biodiesel (B50) for Fuel switch No No transport and handling equipment Use of 2nd generation biodiesel (B100) for Fuel switch No No transport and handling equipment 6.3 Chemicals The tables below provide an overview of the low carbon investment options available within the local chemical industry. Given the very different production pathways used to produce different chemicals, CAIA requested that the low carbon investment options for the main chemicals be considered separately. As the energy usage in the chemicals sector is dominated by coal, natural gas and electricity, as would be expected the low carbon investment options span these three energy carriers. Co-generation comes up as a potential ‘big-win’ given the high demand for both electricity and heat in this sector. 45A stakeholder indicated that there is unlikely to be sufficiently large sources of unutilised heat at open-cast mining operations to support this option. 92 Low carbon finance study (Phase 1 and 2) The World Bank Table 44 Low carbon investment options in nitric acid production Indicative Currently payback Attractive implement- Scale of period Description of low carbon Type of for able in investment (years) or investments investment external South (Rm) indicative finance Africa cost (R/tCO2e) Electricity Combined heat and power (CHP) Yes Yes >1,000 > 10 years generation GHG N2O abatement for new and 40-80 emissions Yes Yes 100-500 existing production plants R/tCO2e abatement No - but Energy Advanced process control could be Yes <50 Unclear efficiency bundled No - but Energy monitoring and Energy could be Yes <50 Unclear management system efficiency bundled No - but Increase process integration and Energy could be Yes <50 Unclear improved heat systems efficiency bundled No - but Energy Energy efficient utility systems could be Yes <50 Unclear efficiency bundled No - but Improved electric motor system Energy could be Yes <50 Unclear controls and VSDs efficiency bundled No - but Energy efficient boiler systems Energy could be Yes <50 Unclear and kilns efficiency bundled CCS for new ammonia production CCS No No plants process emissions Niche plastics and biofuels Production opportunities linked to biomass pathway No No feedstock for Nitric Acid plants shift Revamp: increase capacity and Energy No No energy efficiency efficiency Replace coal-fired partial oxidation processes with natural Fuel switch No No gas-fired steam reforming production [Ammonia production] Use of hydrogen from renewable Fuel switch No No sources Energy Membrane separation No No efficiency 93 Low carbon finance study (Phase 1 and 2) The World Bank Table 45 Low carbon investment options in polymer production Indicative payback Attractive Currently Scale of period Description of low carbon Type of for implement- investment (years) or investments investment external able in South (Rm) indicative finance Africa cost (R/tCO2e) Efficient steam utility in Energy Yes Yes Unclear Unclear industrial hub efficiency Electricity Clean energy generation - PV Yes Yes 50-100 Unclear generation No - but Revamp: increase capacity Energy could be Yes <50 Unclear and energy efficiency efficiency bundled No - but Energy Advanced process control could be Yes <50 Unclear efficiency bundled No - but Energy monitoring and Energy could be Yes <50 Unclear management system efficiency bundled No - but Increase process integration Energy could be Yes <50 Unclear and improved heat systems efficiency bundled No - but Energy Energy efficient utility systems could be Yes <50 Unclear efficiency bundled No - but Improved electric motor Energy could be Yes <50 Unclear system controls and VSDs efficiency bundled No - but Energy efficient boiler Energy could be Yes <50 Unclear systems and kilns efficiency bundled Widely implemented/ Combined heat and power Electricity No Limited (CHP) generation opportunities remaining Production Biomass as a feedstock No No pathway shift Use of hydrogen from Fuel switch No No renewable sources Energy Membrane separation No No efficiency Widely Waste heat and/or gas energy implemented/ Electricity recovery and utilisation for No Limited generation cogeneration opportunities remaining 94 Low carbon finance study (Phase 1 and 2) The World Bank Table 46 Low carbon investment options in carbon black production Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Combined heat and power Electricity Yes Yes >1,000 > 10 years (CHP) generation Production Biomass as a feedstock Yes Yes Unclear Unclear pathway shift Tail-gas energy recovery for combined heat and Electricity Yes Yes 100-500 Unclear power plant (CHP) and generation minimise flaring No - but Energy Advanced process control could be Yes <50 Unclear efficiency bundled No - but Energy monitoring and Energy could be Yes <50 Unclear management system efficiency bundled Increase process No - but Energy integration and improved could be Yes <50 Unclear efficiency heat systems bundled No - but Energy efficient utility Energy could be Yes <50 Unclear systems efficiency bundled No - but Improved electric motor Energy could be Yes <50 Unclear system controls and VSDs efficiency bundled No - but Energy efficient boiler Energy could be Yes <50 Unclear systems and kilns efficiency bundled Revamp: increase capacity Energy No No and energy efficiency efficiency Use of hydrogen from Fuel switch No No renewable sources Energy Membrane separation No No efficiency Widely Waste heat and/or gas implemented/ Electricity energy recovery and No Limited generation utilisation for cogeneration opportunities remaining 6.4 Petroleum products The table below provides an overview of the low carbon investment options available to the refining sector in South African. As expected from examination of the energy and emissions data presented in Section 4.3.6, which suggests that the majority of energy demand is for electricity (both purchased from the grid and generated on site from fuel gas), many of the options presented relate directly or indirectly to electricity demand. CCS has been considered in the sector but has not been identified to be viable in the short to medium term. 95 Low carbon finance study (Phase 1 and 2) The World Bank Table 47 Low carbon investment options in refining Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Improved heat exchanger Energy Yes Yes 100-500 > 10 years efficiencies efficiency Improved electric motor Energy Yes Yes 50-100 > 10 years system controls and VSDs efficiency GHG Minimise flaring and utilise emissions Yes Yes Unclear Unclear flare gas as fuel. abatement No - but Improve process heater Energy could be Yes <50 Unclear efficiency efficiency bundled No - but Improve steam generating Energy could be Yes <50 Unclear boiler efficiency efficiency bundled No - but Energy management and Energy could be Yes <50 Unclear monitoring system efficiency bundled No - but Energy efficient utility Energy could be Yes <50 Unclear systems efficiency bundled Widely implemented/ Energy Improved process control No Limited 50-100 6-10 years efficiency opportunities remaining Waste heat recovery and Energy No No utilisation efficiency Waste heat boiler and expander applied to flue gas from the FCC Energy No No regenerator/Improve energy efficiency efficiency of catalytic cracking Efficient energy production Electricity No No (CCGT and CHP) generation CCS - Existing refineries CCS No No CCS - New Refineries CCS No No Widely implemented/ Use refinery fuel gas (RFG) Fuel switch No Limited instead of HFO opportunities remaining 6.5 CTL and GTL The table below provides an overview of the low carbon investment options available to the CTL and GTL industry in South Africa. The energy intensity of production lends itself to improving energy efficiency, largely electricity. The unavoidable process emissions associated with CTL particularly 96 Low carbon finance study (Phase 1 and 2) The World Bank could signal a theoretically viability for capturing and storing greenhouse gas emissions – although many stakeholders consider carbon capture and storage to be infeasible in South Africa. Table 48 Low carbon investment options in CTL and GTL Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Energy Improved heat systems Yes Yes >1,000 > 10 years efficiency Energy monitoring and Energy Yes Yes 100-500 3-6 years management systems efficiency Energy Improved process control Yes Yes Unclear > 10 years efficiency Improved electric motor Energy Yes Yes 100-500 > 10 years system controls and VSDs efficiency Energy efficient utility Energy Yes Yes 100-500 3-6 years systems efficiency Increase onsite gas-fired power generation - using Electricity 120-160 Yes Yes >1,000 internal combustion generation R/tCO2e engines Waste gas recovery and Electricity No No >1,000 > 10 years utilisation generation Waste heat recovery power Electricity No No generation generation CCS - process emissions from existing plants CCS No No (storage onshore) CCS - process emissions from existing plants CCS No No (storage offshore) CCS - process emissions CCS No No from new plants CCS - CO2 capture and CCS No Unclear compression Widely implemented/ Energy Upgrade feed compressors No Limited efficiency opportunities remaining Energy efficient boiler Energy No Unclear systems and kilns efficiency Conversion of feedstock No (lack of Fuel switch No from coal to natural gas gas) Increase onsite gas-fired Electricity No (lack of power generation - using No generation gas) gas turbines 97 Low carbon finance study (Phase 1 and 2) The World Bank Box 10 Natural gas market in South Africa South Africa is a coal-intensive economy. Natural gas is a potential less carbon-intensive substitute for coal, and could serve as a transitionary energy source in the move to a low carbon economy. Currently the contribution of natural gas to total primary energy supply in South Africa is only 2-3%. Apart from the GHG emissions reduction benefits of utilising more natural gas, it also complements renewable energy in electricity systems because of its flexibility, an is viewed as an important component of energy security in South Africa (Merven, et al., 2017; RSA, 1998; RSA, 2002; National Planning Commission, 2012). The development of gas infrastructure is also seen as a potential driver of local industrial development (The dti, 2017a). The Gas Utilisation Mater Plan (GUMP), developed by the DoE, will form the roadmap for the development of a gas economy. The release of the GUMP has however been delayed due to the delays in finalising the latest Integrated Resource Plan (IRP) for the electricity sector. As a result, a proposed LNG-to- Power IPP procurement programme has been put on hold (IPP Gas, 2017). There is currently a lot of uncertainty around the finalisation and role of the latest IRP, and it is not clear when the programme will resume. Frost and Sullivan (2016) highlight several challenges to the development of the gas sector in South Africa. Foremost amongst these is a lack of stable local demand for natural gas, and where gas will be sourced from. Without localised gas demand, it is difficult to develop distributed gas supply and, without distributed gas supply, it is difficult to develop localised gas demand. A challenge in developing the gas sector is to bring gas demand and supply on stream at the same time. A solution to this challenge is to create significant anchor gas demand through the development of a Gas to Power Programme. But as mentioned above, the future of the only such programme currently in development local is unclear. Despite extensive drilling along South Africa’s coastline, only marginal conventional gas discoveries have been made, with limited future prospects.46 Because of limited demand, South Africa currently has limited gas pipeline infrastructure and no liquefied natural gas (LNG) terminals or regasification plants – which prevents significant natural gas imports. Sasol is currently the only imported of natural gas into South Africa (from Mozambique). Even if South Africa does successfully secure a stable supply and demand for a natural gas, the lack of a supporting policy environment will hold back the development of gas economy. Without some form of carbon pricing, gas many not be competitive against low cost coal. High development and switching costs associated with converting existing operations may also be a problem. The delays in finalising the GUMP is also undermining confidence in the sector, and the scope for gas electricity generation may be reduced due to falling electricity demand – and will most likely disappear if the government proceeds with its nuclear energy plans. 46South Africa has potentially very large deposits of shale gas in the Karoo Basin, but recent developments have cast doubt on the economic viability of the reserves (Carnie, 2017; Council for Geoscience, 2016). 98 Low carbon finance study (Phase 1 and 2) The World Bank 6.6 Cement The table below provides an overview of the low carbon investment options available to the cement industry in South Africa. Although there is a smaller percentage of the energy demand met by electricity in this sector, there is a selection of options available to address electricity demand. Other options identified initially relate to the production pathway and the other energy carriers in this sector, but stakeholders considered few of these options ready for investment at present. Table 49 Low carbon investment options in cement Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Energy Improved process control Yes Yes 50-100 > 10 years efficiency Waste heat recovery from Electricity kilns and Yes Yes 500-1,000 Unclear generation coolers/cogeneration Utilise waste material as Fuel switch Yes Yes 50-100 <40 R/tCO2e fuel No - but Energy monitoring and Energy could be Yes <50 Unclear management system efficiency bundled No - but Energy-efficient utility Energy could be Yes <50 Unclear systems efficiency bundled Improved electric motor No - but Energy system controls and could be Yes <50 Unclear efficiency variable speed drives bundled Widely implemented/ Reduction of clinker content Energy No Limited 50-100 > 10 years of cement products efficiency opportunities remaining No (Lack of Utilise natural gas47 Fuel switch No gas) Geopolymer cement Production No No production pathway shift CCS - back-end chemical CCS No No absorption CCS - oxyfuelling CCS No No Production Fluidized bed cement kiln No No pathway shift Production CSA Belite Cements No No pathway shift Production Magnesium oxide cements No No pathway shift 47 A stakeholder indicated that even where gas is available, it is not competitively priced. Also, switching from coal to gas on a plant that was designed for coal leads to a production penalty as the additional volume of product contributed by coal ash is lost. 99 Low carbon finance study (Phase 1 and 2) The World Bank Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Widely Implement kiln systems with implemented/ Technology multistage cyclone No Limited substitution preheaters and precalciner opportunities remaining Utilise natural gas Fuel switch No No 6.7 Iron and Steel and ferroalloys The table below provides an overview of the low carbon investment options available to the iron and steel industry in South Africa. The energy balance data suggests that a wide range of energy carriers is used in this sector. Furthermore, different production routes have significantly different energy and emissions profiles. Both of these observations explain the wide range of potential low carbon investment options in this sector, which range from electricity and fuel efficiency to technology and fuel switches to carbon capture. Table 50 Low carbon investment options in iron and steel Indicative Currently Attractive payback implement- Scale of Description of low carbon Type of for period (years) able in investment investments investment external or indicative South (Rm) finance cost Africa (R/tCO2e) Top gas pressure recovery Energy Yes Yes 100-500 6-10 years turbine efficiency BOF waste heat and gas Energy Yes Yes 500-1,000 6-10 years recovery efficiency Improved electric motor Energy system controls and Yes Yes 100-500 <3 years efficiency variable speed drives Electricity State-of-the-art power plant Yes Yes >1,000 > 10 years generation Energy efficient boiler Energy Yes Yes 100-500 > 10 years systems and kilns efficiency Onsite clean power Electricity Yes Yes Unclear Unclear generation generation No - but Energy efficient utility Energy could be Yes <50 Unclear systems efficiency bundled No - but Energy Improved process control could be Yes <50 Unclear efficiency bundled No - but Energy monitoring and Energy could be Yes <50 Unclear management system efficiency bundled No - but Improved heat exchanger Energy could be Yes <50 > 10 years efficiencies efficiency bundled 100 Low carbon finance study (Phase 1 and 2) The World Bank Indicative Currently Attractive payback implement- Scale of Description of low carbon Type of for period (years) able in investment investments investment external or indicative South (Rm) finance cost Africa (R/tCO2e) CO2 capture and sale CCS Unclear Unclear Electric arc furnace (EAF) Production and secondary production No No48 >1,000 Unclear pathway shift route Technology No (lack of 80-120 DRI – HYL No >1,000 substitution gas) R/tCO2e Technology No (lack of 80-120 DRI – Midrex No >1,000 substitution gas) R/tCO2e The use waste plastic in Fuel switch No No blast furnaces Use of natural gas in blast No (lack of Fuel switch No Unclear Unclear furnaces gas) Technology DRI - ULCORED No No substitution State-of-the-art power plant CCS No No (with CCS) Top gas-recycling blast Energy No No furnace (with CCS) efficiency CCS - Blast Furnace (post- CCS No No combustion) Technology Hlsarna No No substitution Electrolysis as an Technology alternative to traditional No No substitution furnaces Hydrogen reduction Fuel switch No No Onsite clean power Electricity No No generation - Gas generation The table below provides an overview of the low carbon investment options available to the ferroalloys industry in South Africa. The high dependence on electricity explains the wide range of electricity-related options related to this commodity. 48 Technically a feasible option, but sector is not investing due to global over-supply. 101 Low carbon finance study (Phase 1 and 2) The World Bank Table 51 Low carbon investment options in ferroalloys Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Waste heat recovery - from Electricity semi-closed furnace - Yes Yes 500-1,000 Unclear generation Rankine Cycle Waste heat recovery- from Electricity semi-closed furnace - Yes Yes >1,000 3-6 years generation Organic Rankine Cycle No - but Energy monitoring and Energy could be Yes <50 Unclear management system efficiency bundled No - but Improved electric motor Energy could be Yes <50 Unclear system controls and VSDs efficiency bundled No - but Energy efficient utility Energy could be Yes <50 Unclear systems efficiency bundled No - but Improved heat exchanger Energy could be Yes <50 Unclear efficiencies efficiency bundled Replace submerged arc Technology furnace semi-closed with Unclear Unclear 500-1,000 3-6 years substitution closed type Waste gas recovery and Electricity power generation - CO Unclear Unclear 100-500 <3 years generation from closed furnace Widely Implementing best implemented/ Energy available production No Limited 500-1,000 6-10 years efficiency techniques49 opportunities remaining On-site clean power Electricity No No generation - RE generation Use biocarbon reductants Energy No No instead of coal/coke efficiency On-site clean power Electricity generation - Offgas to No No generation biofuel via algae 6.8 Non-ferrous metals The table below provides an overview of the low carbon investment options available to the primary aluminium industry in South Africa. 49 Including improved raw material handling and storage, improved pre-processing of raw materials and improved core processes. 102 Low carbon finance study (Phase 1 and 2) The World Bank Table 52 Low carbon investment options in aluminium smelting Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Energy Cathode redesign Yes Yes 50-100 3-6 years efficiency Energy Spray coating for anodes Yes Yes >1,000 <3 years efficiency Best process selection for No - but primary aluminium smelting Energy could be Yes <50 6-10 years / technology upgrade efficiency bundled options No - but Energy Improved process control could be Yes <50 Unclear efficiency bundled No - but Improved electric motor Energy could be Yes <50 Unclear system controls and VSDs efficiency bundled No - but Energy Improved explosion welding could be Yes <50 3-6 years efficiency bundled No - but Energy Monitoring and Energy could be Yes <50 Unclear Management System efficiency bundled No - but Energy efficient utility Energy could be Yes <50 Unclear systems efficiency bundled Widely Switch to secondary implemented/ Production production and increase No Limited 500-1,000 <3 years pathway shift recycling opportunities remaining Clean on-site power Electricity No No Unclear generation generation Clean on-site power Electricity No No generation - Gas generation Widely implemented/ Convert existing technology Technology No Limited to PFPB technology substitution opportunities remaining Lower electrolysis Energy No No temperature efficiency Application of a dynamic Energy No No AC magnetic field efficiency Wetted drained cathodes Technology No No (linked to inert anodes) substitution Technology Inert Anodes No No 50-100 <3 years substitution Technology Carbothermic reduction No No substitution 103 Low carbon finance study (Phase 1 and 2) The World Bank The primary dependence on electricity as an energy carrier explains the focus on options targeting electricity usage in aluminium production. As lead and zinc are much smaller contributors to energy demand and emissions, low carbon investment options for these commodities were not included in the study. 6.9 Glass The table below provides an overview of the low carbon investment options available to the glass industry. Gas and electricity related options dominate, which is unsurprising given the relatively high percentage of these two carriers to energy demand in the sector. Table 53 Low carbon investment options in glass Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Onsite clean power Electricity Yes Yes 50-100 6-10 years generation (PV) generation Energy Vertically fired furnaces Yes Yes 50-100 > 10 years efficiency No - but Energy More Efficient Forehearths could be Yes <50 <3 years efficiency bundled No - but Batch and cullet pre- Energy could be Yes <50 <3 years heating efficiency bundled No - but Energy Forhearths process control could be Yes <50 <3 years efficiency bundled No - but Computerised process Energy could be Yes <50 <3 years control efficiency bundled Adjustable speed drives on No - but Energy combustion air fans and could be Yes <50 <3 years efficiency compressor motors bundled Energy Oxy-fuel Furnaces Unclear Unclear 50-100 > 10 years efficiency Electricity Minigrids No No generation Widely implemented/ Production Increased Cullet Use No Limited <50 <3 years pathway shift opportunities remaining Widely implemented/ Energy Regenerative furnaces No Limited efficiency opportunities remaining Production Selective batching No No pathway shift 104 Low carbon finance study (Phase 1 and 2) The World Bank Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Oscillating Combustion for Technology No No Glass Production substitution Electricity Waste heat boilers No No generation 6.10 Pulp and paper The table below provides an overview of the low carbon investment options available to the pulp and paper sector in South Africa. The high demand for energy for heating in this sector explains the high number of options focused on heating. Table 54 Low carbon investment options in pulp and paper Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) 6-10 years (with CDM Convert fuel from coal to funding), 80- biomass/residual wood Fuel switch Yes Yes 100-500 120 R/tCO2e waste (without CDM funding) Biomass for electricity Electricity Yes Yes >1,000 6-10 years generation generation Energy efficient boiler Energy systems and kilns and Yes Yes 50-100 <3 years efficiency Improved heat systems Application of Co- Electricity generation of Heat and Yes Yes 500-1,000 3-6 years generation Power (CHP) Electricity Mini hydro50 Yes Yes <50 <3 years generation No - but Energy monitoring and Energy could be Yes <50 management system efficiency bundled Energy-efficient utility No - but systems (e.g. lighting, Energy could be Yes <50 refrigeration, compressed efficiency bundled air) No - but Energy Improved process control could be Yes <50 efficiency bundled 50A stakeholder has indicated that external funding is being sought for this option, and therefore it has been included as a realistic option for external finance. 105 Low carbon finance study (Phase 1 and 2) The World Bank Indicative Attractive Currently payback Scale of Description of low carbon Type of for implement- period (years) investment investments investment external able in South or indicative (Rm) finance Africa cost (R/tCO2e) Coal waste-biomass pellets Fuel switch No51 Unclear Unclear Unclear Widely Energy efficient electric implemented/ Energy motors, improved controls No Limited 50-100 > 10 years efficiency and variable speed drives opportunities remaining Electricity Gasification of Black Liquor No No generation Energy efficient Thermo Energy No No Mechanical Pulping (TMP) efficiency Bioethanol and biodiesel Fuel switch No No 7 GAPS AND BARRIERS TO LOW CARBON FINANCE Numerous gaps and barriers to low carbon investment were mentioned during the stakeholder consultation process. This is to be expected given the range of activities that qualify as low carbon investments, and the fact a variety of rules and regulations impact on expansion, operation and maintenance activities even when they are not relate to low carbon objectives. Appendix 8 provides a summary analysis based on these stakeholder consultations. Based on the literature review, analysis in the previous sections of the report and the stakeholder consultations a broad set of gaps and barriers are discussed in the sections that follow. These are identified from both a demand and supply perspective. A summary of the different gaps and barriers across the demand and supply factors is provided in Figure 57. Section 8 provides a preliminary assessment of interventions that could address these gaps and barriers. 51 Not proven at scale locally. 106 Low carbon finance study (Phase 1 and 2) The World Bank Figure 57: Summary of identified low carbon investment gaps and barriers Electricity supply and demand for finance Factors influencing price uncertainty is Few low carbon Low cost finance and Commercial driving energy investment options are carbon pricing could efficiency and suitable for external stimulate low carbon factors renewable energy financing investment investments Limited public sector technical capacity. Policy Policy and regulatory Electricity market Low awareness and use uncertainty reforms and strong of existing incentives factors mitigation policy signals lacking. Perception of small Overall lending Factors influencing Investment criteria for supply of finance market of reputable low Concessional finance low carbon projects the same as standard carbon project not viewed favourably and investment implementers and by financiers investments suppliers environment Too few large ESCOs High transaction costs Payback periods relative to project value are constraining Market and generally longer than investment in both desired for low carbon is preventing external small and large low investment financing of smaller carbon investment investments options options structure Drivers, Gaps and Barriers Source: DNA Economics 107 Low carbon finance study (Phase 1 and 2) The World Bank 7.1 Factors influencing demand for finance 7.1.1 Commercial factors 7.1.1.1 Electricity supply and price Unsurprising, given the sharp increases in electricity prices highlighted earlier, energy prices are the largest driver of low carbon investments in South Africa at present. In addition, security of supply concerns still acts as an important driver of low carbon investments (see Section 4.2).52 Stakeholders indicated that while they are less concerned about Eskom’s ability to generate sufficient electricity53, intermittent supply and outages as a result of a lack of maintenance on transmission and distribution infrastructure have become increasingly frequent. So much so that some companies have taken over the maintenance of electricity substations even where these are located outside the boundaries of their facilities. This problem appears to be particularly acute where companies receive their electricity supply from municipalities rather than directly from Eskom. Demand for electricity also appears to be becoming more elastic, as there are more options and alternatives becoming viable. It is evident that renewable energy costs have fallen to a level where they can compete with coal. According to Boonzaaier et al., (2015), given the rise in electricity prices, there are a number of “tipping points” that could lead to businesses altering their electricity demand profiles which include: • The decision to generate their own electricity; • The decision not to invest and further based on revenue/cost ratios; • Investing elsewhere in the region or in another sector or in large energy efficiency programmes; or • Shutting down one or more parts of their business. The decisions made around “tipping points” will have large ramifications for Eskom sales. Despite previous years’ shortfalls, Eskom’s failure to incorporate the shift toward a less electricity-intensive economy into its plans, combined with over-optimism about GDP growth, has had significant implications and has led to a current oversupply of electricity in South Africa. While Boonzaaier, et al., (2015) showed that only two firms in the steel and platinum sectors had reached their ‘tipping point’ under a low tariff scenario, the impact of high and moderate tariffs on firms will influence 52 Electricity price was mentioned 9 times by stakeholders as a driver of low carbon investments in heavy industry, and security of supply concerns 6 times (out of a total of 37 mentions). Other important drivers of low carbon investments included company climate change concerns or targets, and the pending carbon tax (both mentioned 5 times). 53 Concerns nevertheless remain that the management and other inefficiencies that have plagued the utility in recent times may lead to unanticipated issues in future. Worrying information about the financial state of Eskom became public after the stakeholder consultation process concluded. Ongoing management and governance issues and inefficiencies have led NERSA to award Eskom a much lower tariff increase than it had requested. This is in line with good regulatory pricing principles, as one of the main objectives of economic price regulation is to prevent regulated entities with market power from artificially inflating their prices as a result of inefficiencies, waste and rent-seeking. This, however, coupled with pre-existing financial difficulties, have raised concerns about Eskom’s ability to continue as a going concern (Mantshantsha & Cowan, 2017; Slabbert, 2017b). It is unlikely that government will allow Eskom to fail, given that this will lead to a unaffordable amount of government guarantees across a number of public sector entities being called in, and it would also jeopardise electricity generation. But given that the issues at Eskom have been allowed to escalate to this level, it is almost certain to impact on its ability to provide a stable and uninterrupted electricity supply across the country in future. 108 Low carbon finance study (Phase 1 and 2) The World Bank operating profits and it is likely energy intensive industries will undergo structural changes in the coming years. Moves to shut down or move electricity-intensive activities oversees are already being seen in South Africa, and this is worrying form an economic growth perspective (Van Staden, 2018; Ryan, 2015). Given the falling costs of renewable energy, there may be an opportunity to reduce this trend via own generation or the increased use of IPPs (both captured and feeding into the national grid). Representatives of all but the most electricity-intensive heavy industry sectors agreed that they consider electricity at stable and predictable prices as critical to the long-term prospects of their sectors, and most believed that renewable energy could play a role in this regard. The experience of the City of Cape Town’s power purchase agreement shows the value of procuring electricity with clear and stable pricing. When the City of Cape Town began procuring electricity from the Darling Wind Farm in 2008 at the start of its 20-year PPA, it paid almost 3 times the Eskom tariff (37c/kWh compared to 12.5c/kWh). The price of electricity under the PPA, however, escalated at the rate of inflation, whereas the price escalations afforded to Eskom’s by NERSA has been significantly above inflation since 2008. The result is that by 2015 the City of Cape Town was paying 54.56 c/kWh (excluding VAT) for electricity under the PPA, while the equivalent Eskom tariff was approximately 65c/kWh (excluding VAT) (Van Breda & Botha, 2017a). Perversely, however, the lack off a clear price path for electricity in South Africa is complicating the economic assessment of renewable energy projects, since while the cost of renewables is clear, the benefit in cost savings relative to the price of grid electricity is not. This has caused some stakeholders to delay implementing renewable energy projects. The uncertainty of supply and price of national grid electricity has inadvertently become a key driver influencing the demand for low carbon finance. The lack of a clear price path for electricity in South Africa, however, has caused uncertainty about the returns of long-term electricity generation investments. 7.1.1.2 Feasibility of low carbon options Numerous low carbon investment opportunities were identified in the focus sectors.54 However, not all opportunities were considered feasible, either from a technology perspective or because of domestic factors. Stakeholders indicated that investments of below R50 million were typically undertaken internally, and where thus unlikely to be considered for external finance unless they were bundled into a larger programme, or were undertaken by an ESCO or third party that approached a company offering attractive terms.55 For the identified opportunities with potential for financing, this indicated a clear 54 204 possible options were identified, noting though that the same investments in different sectors were counted as additional investments. 55 Options smaller than R50 million were also often implemented via operational rather than investment budgets, which limited the availability in terms of costs and payback periods linked to these options. Where options were implemented via 109 Low carbon finance study (Phase 1 and 2) The World Bank distinction between opportunities that could be financed through internal or external investment. The feasibility of these options is summarised in Figure 58. Just over half of the potential investments identified were considered as potentially attractive for either internal (requiring investments smaller than R50 million) or external (investment cost R50 million or larger) financing. For the options not considered feasible, a significant proportion of these were not deemed attractive to finance because the technology or process had not yet been sufficiently proven in South Africa. A small proportion of options were already widely implemented, implying that there were few remaining investment opportunities, or were not feasible because of the current limited availability of natural gas. Figure 58: Feasibility of low carbon investments in heavy industry sectors (number of investment options) Potential for external financing, 51 Options not feasible, 97 Not considered realistic in SA, 58 Widely implemented/ Limited opportunities remaining, 19 No gas, 9 Other and unclear, 11 Potential for internal financing, 56 Source DNA Economics For larger investment opportunities, the likely payback period was identified as a significant constraint for many of the potential investments. Even if companies were not funding constrained, only a small proportion of available low carbon investment options would be attractive from a payback period perspective. Capital would thus rather be deployed to other areas within companies. In addition, the number of feasible external financing options available to specific heavy industries varies widely. Overall, however, there are a relatively low number of attractive low carbon options for external operational budgets, they were also often implemented in an incremental way as result of a policy decision without a formal cost-benefit analysis. Options like variable speed drives, and energy efficient lighting, for instance, were often deployed as part of routine maintenance rather than as once-off undertakings. As an example, a number of stakeholders indicated their organisations had policies in place to replace old and relatively inefficient pumps and motors with modern energy efficient ones rather than repairing them. 110 Low carbon finance study (Phase 1 and 2) The World Bank financing across all the sectors considered. This indicates that it would be risky to develop an instrument or approach to support low carbon investment that only focusses on a particular sector (or small set of sectors). Given the large number of small options identified, support to the ESCO market to aggregate these options into investable investment programmes may be warranted (as discussed in Section 7.2.2.3 and 8.3). The potential options identified are heavily skewed to energy efficiency and electricity generation. More than 80% of the large options belong in these two categories (roughly equally split), whereas all but one of the small options relate energy efficiency options. Furthermore, it is encouraging that all but a small minority of options are likely to generate a return even in the absence of a carbon tax or other mitigation instruments. This creates the possibility that low-cost finance (either directly or in conjunction with credit enhancements) could be used to adjust the risk-return profiles of these options in a way that makes them attractive for both industrial companies and finance providers. It also bodes well for the efficacy of economic instruments, like the proposed carbon tax, to adjust investment profiles and reduce payback periods. A significant barrier to higher investment is the relative lack of attractive large low carbon investment options. Most options generate a return, which creates the possibility that low-cost finance or carbon pricing can stimulate additional investment At least some of the large number of smaller options identified could be bundled into larger investment programmes by ESCOs. 7.1.2 Policy factors 7.1.2.1 Policy and regulatory issues General policy and regulatory uncertainty was identified in both the literature review and stakeholder consultations as a key constraint to low carbon investment. Areas of policy uncertainty related primarily to electricity and energy policy and planning, and South Africa’s climate change mitigation policy. Consultations with stakeholders identified general policy uncertainty in South Africa’s energy market as a key factor impacting on investment decisions. This relates to, for example, uncertainty around the REI4P programme (and Eskom’s delay in approving projects) and policy uncertainty around energy planning. The degree of energy policy uncertainty increased significantly after the stakeholder engagement process was concluded when the current Minister of Energy announced that all official energy planning done in South Africa since 2010 has effectively been set aside, and that the outdated 2010 Integrated Resource Plan (IRP) will officially determine which electricity generation capacity will be built in South Africa (Van Rensburg, 2017a). It has been estimated that following the 2010 IRP generation mix recommendations could lead to between R25 billion and R50 billion more being spent on electricity generation in South Africa than is required by 2030 (Van Rensburg, 2017a), which undoubtedly will place upwards pressure on electricity tariffs over this period. It has also been reported in the press that responsibility for 111 Low carbon finance study (Phase 1 and 2) The World Bank finalisation of the IRP has been moved from the Eskom and DoE energy planning technocrats to a team headed directly by the Minster of Energy, which raises concern given the complex nature of the document (Yelland, 2017). Furthermore, given the fast track nature of the current process and the lack of consultation, it is expected that the validity of the final document will be challenged in court – thereby prolonging policy uncertainty in the local electricity sectors (Yelland, 2017a). From an electricity regulation perspective, issues related to grid access (including net metering) and wheeling (and the lack of NERSA regulations related to these issues), the lack of broadly applied time-of-use tariffs, and the need for ministerial approval for licences, have been highlighted as key factors inhibiting wider investment in low carbon activities.56 The length of time required to enter into agreements with wheeling license holders (of which there currently is only one in South Africa), Eskom and relevant municipalities for wheeling across their network infrastructure was listed as a barrier to investment. As an example, it took roughly three years to conclude a wheeling agreement with Eskom and the Tshwane municipality to allow biogas power to be supplied to a BMW plant. Where mechanisms were found to overcome regulatory uncertainty, like the use of the REI4P to procure renewable energy, large amounts of funding for low carbon investments were forthcoming. Stakeholders believed that regulatory interventions to allow electricity to be wheeled across the grid more easily (to benefit all renewable projects), formalisation of net-metering rules and regulations (to benefit smaller renewable projects), and simplifying the process to issue generation licenses to renewable energy IPPs, could unlock low carbon investments. This view is supported by the launch of the first debt fund in South Africa targeting small-scale renewables outside of the DoE’s Small Project Independent Power Producer Programme (see footnote 60) (Kilian, 2018). In addition, stakeholders in the heavy industry raised most often issues related to the complexity and compliance burden of environmental regulation, such as Environmental Impact Assessments. Other related issues that were identified included lengthy and expensive administrative regulatory processes associated with obtaining permits and licences and securing lease rights. Barriers related to the implementation and burden of environmental regulation are complicated as they involve weighing up different policy objectives and are implemented by different levels of government.57. Another common barrier to low carbon investment identified during the literature review (and confirmed during stakeholder consultations) was a lack of technical or legal capacity within government entities, which reduced the likelihood that heavy industrial users could rely on municipalities and other non-national government entities to provide them with renewable energy. Frequently, government institutions do not have the technical knowhow or capacity to assess the 56 As a result of delays in having a request for a ministerial determination to allow it to contract with an IPP adjudicated by the DoE, the City of Cape Town is currently challenging the legitimacy of the ‘single-buyer’ model (under which only Eskom is allowed to contract with IPPs with a capacity of more than 1MW) in the courts (Yelland, 2017c; Van Breda & Botha, 2017a). Cape Town is contending that the currently legal framework allows it to contract directly with IPPs, and that a ministerial declaration is not required for NERSA to issue a generation license. Effectively, the City of Cape Town is requesting the same rights as PowerX to contract with IPPs and distribute the electricity provided across its distribution network. 57 Environmental regulation in South Africa is a concurrent function in terms of the Constitution, which means that national government departments, provinces and municipalities all have different roles and responsibilities – and while national government departments can set down norms and standards to guide the consistent implementation of regulations, it cannot directly influence implementation. 112 Low carbon finance study (Phase 1 and 2) The World Bank viability of unsolicited approaches from project developers, and slow government decision making leads to an increase in risk and cost. A lack of skills with regulators was also believed to be contributing to regulatory and policy uncertainty, and the compliance burden of environmental regulation. Stakeholders also felt strongly that more certainty about future climate mitigation policy in South Africa is important to unblock the flow of funding to low carbon investments. Stakeholders mentioned the need for: • Clarity on the alignment between the carbon tax and carbon budgets. • Alignment of air quality and climate change reporting requirements. • Certainty on what the post-2020 mitigation system will look like. • Finalisation of the carbon tax design to provide certainty regarding future carbon tax rates. • Details and coverage of the carbon tax-related offset mechanism. This is consistent with the results from the literature review, which found that a lack of strong supportive signal from government creates uncertainty about future mitigation policy and hampers future growth and planning. Box 11 Mandates of selected public sector entities that could impact low carbon activities Various public sector entities are involved in the policy, regulation and implementation of low carbon activities in South Africa. This complicates the regulatory environment as mandates are not always clearly defined or delineated. The mandates of some of these entities are shown below. Role Player Mandate Department of Energy (DoE) Custodian of policy and planning for the energy sector, focusing on energy security through diversifying the country’s energy mix to include renewable energy sources. Leading development of carbon offset mechanism proposed as part of the carbon tax. Responsible for energy planning in South Africa. National Energy Regulator of South Regulates the energy sector in the context of national policy and planning, Africa (NERSA) license new energy infrastructure and regulate electricity and hydrocarbons infrastructure tariffs National Treasury Governs fiscal and procurement policies. Responsible for design of the carbon tax. Department of Trade and Industry (DTI) Develops local industries and trade strategies, with particular focus on green industries and job creation; works to attract foreign investment. Responsible for large array of government incentives. Department of Public Enterprises Shareholder in Eskom, the sole power off-taker from independent power (DPE) projects larger than 1MW. Department of Economic Development Sets and develops economic policy, economic planning and economic (EDD) development; focuses on employment creation and the green economy Department of Environmental Affairs Sustainable development and environmental integrity; grants (DEA) environmental authorisations in terms of the National Environmental Management Act (NEMA). Responsible for implementation of the National Climate Change Response Strategy and development of carbon budgets. Provincial departments and Regulate private renewable energy generation (embedded generation) municipalities through by-laws and policies Source: Adapted from WWF (2017) 113 Low carbon finance study (Phase 1 and 2) The World Bank Policy uncertainty with regard to South Africa’s climate mitigation policy is compounded by the fact that there are multiple public sector stakeholders that are either directly responsible for aspects of this policy, or that can significantly influence policy outcomes. This is reflected in Box 11. Policy and regulatory uncertainty related to energy policy and planning is reducing low carbon investments. The complexity and compliance burden of environmental regulation was also mentioned as a barrier. Limited public sector technical capacity is exacerbating regulatory and policy barriers. Targeted regulatory reforms in the electricity market can unlock low carbon investment projects, as can strong signals on future climate change mitigation policy. 7.1.2.2 Industrial incentives As highlighted in section 5.2.2, numerous mechanisms are available in South Africa that could support industrial sectors to undertake low carbon investments. The level of awareness of these incentives among the heavy industry sectors, however, appears to be comparatively low. Some stakeholders believed this is the case because companies rely too heavily on ESCOs, service providers and/or consultants to make them aware of incentives as opposed to investigating the available incentives themselves. In general, only three incentive programmes were seriously considered or utilised by the heavy industry firms, namely Eskom DSM funding, CDM funding, and the 12L energy efficiency tax incentive. Furthermore, two of these three incentives are not currently particularly useful in supporting low carbon investments. The Eskom IDM/DSM programme has been refocused on ESCOs and its future is highly uncertain (see Section 5.2.2), whereas low CER prices in the wake of the 2008 global financial crisis has significantly reduced the ability of the CDM mechanism to support low carbon investments in South Africa. Almost all companies had considered the 12L energy efficiency tax incentive. Most companies, however, were not successful in accessing this incentive, and several companies did not apply for it because of the perceived complexity of the process. It was generally felt that due to high monitoring and verification costs, and other transaction costs, this incentive was only worth applying for in relation to very large investments. Stakeholder view on available incentives are shown in Appendix A 8.2. The insights regarding the low awareness and use of these incentives is supported by related studies, which found that public sector subsidies and incentives had a relatively minor role in supporting low carbon investments – and was overshadowed by increases in electricity prices.58 The large number of available mechanisms that could potentially support low carbon investments in South Africa thus likely paints a misleading picture of the actual level of public sector provided to 58 See for example Cloete et al. (2011). 114 Low carbon finance study (Phase 1 and 2) The World Bank support such investments. This highlights the importance of putting mechanisms like a carbon tax or carbon budgets in place to increase the return from low carbon activities, and also justifies a more in-depth assessment of how existing support mechanisms could be tweaked, consolidated or replaced to more effectively support low carbon investments.59 Despite numerous incentives that can be accessed to support low carbon activities being available, they are not effectively driving investment due to low awareness and the cost and complexity of accessing these incentives being perceived as prohibitive. 7.2 Factors influencing the supply / availability of finance 7.2.1 Overall lending and investing environment 7.2.1.1 Assessing low carbon investment options Stakeholders in the financial sector indicated that low carbon investments are assessed using the same criteria as standard / typical investments. These typical assessment criteria included: • Technology and regulatory risks, • Internal rates of return and payback periods, and • Financial status and market prospects of the implementing company. Thus, the potential wider positive (non-financial) externalities and benefits from low carbon investments are generally not considered when evaluating such private sector opportunities for investment purposes. However, in addition, and specifically for low carbon investments (such as renewable energy), stakeholders in the financial sector indicate that the reputation and track record of the firm supplying the equipment was an important consideration. A common example involves solar energy installations, where the quality, warranty and guarantee terms of the solar panels would be assessed prior to approving the investment. The rationale is that since the payback periods for such investments were typically long, financial sector investors want to ensure that the associated risk posed by the continuity of business operations by the project developer is minimised. Investment in low carbon activities is assessed similarly to general investments / projects. As a result, investments that have potentially large (but long-term) wider economy benefits may not be considered for financing. A lack of reputable project implementers and equipment suppliers negatively affects the bankability of projects. The long-term nature of such projects means that the capacity and longevity of project developers/service providers are critical to the investment’s success. 59 More information regarding the views of heavy industry with respect to the available incentives is provided in Appendix 8. 115 Low carbon finance study (Phase 1 and 2) The World Bank 7.2.1.2 Concessional financing is not attractive to finance industry Multilateral and South African DFIs have, to varying degrees, provided wholesale (for on-lending by the South African banking sector) and direct financing (to project implementers) for green and low- carbon initiatives. However, near consensus feedback from the South African banking sector was that wholesale finance and credit lines provided by donors and DFIs for green and sustainable investment were mostly not attractive. Concessionary wholesale finance was often more expensive than corporate banks’ own funds, particularly where the finance or credit lines were denominated in foreign currency. Converting this to local currency for investing raised the cost of such finance. Financial sector stakeholders indicated that the IFC is in the process of introducing a local currency credit line that could be accessed by corporate banks, and were hopeful that this could make the available funding more attractive. Donor and DFI-provided credit lines and wholesale finance where also viewed as costly to administer, manage and monitor. This stems from due diligence, monitoring and evaluation requirements which are not compatible with the administrative systems and processes Some discussants suggested that ring-fencing such credit lines without tying these lines to significantly punitive administrative requirements could enhance the willingness of corporate banks to access and utilise the credit lines. Furthermore, it appears that DFIs and donors are only in the early stages of providing other support mechanisms (beyond concessionary finance) in South Africa to encourage financing of low carbon investments, such as investment guarantee schemes or other credit enhancement mechanisms. These mechanisms may be better received by the South African financial stakeholders given that they focus more explicitly on sharing risk rather than reducing the cost of finance. The literature review highlighted the view that information sharing between funders is currently happening on an informal and ad hoc basis, and that consequently funders are often not aware of opportunities to collaborate with other funders. This is believed to be a problem that hampers co- funding by commercial finance providers and DFIs. On the other end of the scale of investments, the literature review showed that funding for small projects presents additional challenges due to a lack of economies of scale. Small-scale projects suffer from long lead times, and high project preparation and environmental authorisation costs relative to returns. Without concessionary funding, and/or mechanisms to bundle these options together or reduce their transaction costs via a programmatic approach, it is unlikely that many of these projects will qualify for external funding.60 60South Africa’s first debt vehicle targeting small-scale renewable projects in the private sector, the Facility for Investment in Renewable Small Transactions (First), was recently launched in collaboration between Rand Merchant Bank and KfW Development Bank (Kilian, 2018). While KfW is providing first-loss financing to the vehicle, target loans will be R50 million to R300 million. Low carbon investment options classified as ‘small’ in this working paper are thus unlikely to qualify unless they are bundled into larger investment programmes. 116 Low carbon finance study (Phase 1 and 2) The World Bank Donor and DFI-provided concessionary wholesale finance to support low carbon investments are mostly not considered attractive by the South African financial sector due to relatively high costs, high administrative burden, and a lack of sufficient risk reduction 7.2.2 Market factors and investment structuring 7.2.2.1 Cost of finance and payback periods The literature identified issues related to the lending, bankability and payback periods required by financial institutions as the most common challenges encountered in financing low carbon investments. Banks are risk aversive and typically only lend for 5-7 years while the breakeven point (payback period) for renewable energy is typically around 15-17 years. Of the 51 potential large low carbon investment options discussed with stakeholder, only 13 where expected to have a payback period of less than 6 years (see Appendix A 8.1). The findings related to the cost of finance and payback periods resonate strongly with findings in the literature. Almost all traditional banks consulted identify the extended payback period of low carbon investments as a particularly high hurdle when deciding whether to finance and invest in such activities. On average, South African corporate banks suggest that they would not consider project- based financing where the payback period extends beyond 5 to 7 years. On-balance sheet lending provided to South Africa’s industrial corporates is typically far shorter. The high level of risk aversion in terms of project payback periods extends to DFIs operating in this space, with these also exhibiting limited appetite to match finance to the generally long payback periods of low carbon investments. For financial entities, the cost of finance is directly related to project and firm specific risk and return factors, and none of the financial sector consultations could provide a fixed cost of finance for low carbon investments. However, several stakeholders suggest that project finance for smaller projects is not feasible given the high transaction costs. As an example, a corporate bank suggested that it was difficult to justify project finance for less than R200 million given the cost of due diligence, legal costs and other transaction-related costs. This is consistent with the views reported in Cloete et al. (2016). In addition to the cost of structuring transactions, small-scale projects may suffer from issues experienced in large-scale projects (including long lead times, high project preparation and environmental authorisation costs relative to returns), reducing the overall profitability of the project. Project costs are therefore often increased due to a lack of economies of scale in procurement. Unsurprising stakeholders believe that smaller low carbon investments and projects (typically those less than R50 million) are financed internally by many of South Africa’s industrial firms. This is especially the case for those low carbon investments where the internal rates of return are high and the upfront cost could be absorbed into the firms’ operating budgets. Such projects, are either implemented from a firm’s internal funds or through standard lines of credit extended to firms by the financial sector. 117 Low carbon finance study (Phase 1 and 2) The World Bank Long payback periods for many low carbon investments is a key barrier preventing financing. Low carbon investments typically have much longer payback periods than those that the South African financial market finds acceptable. Smaller options are typically financed internally, but high transaction costs relative to project value prevent options that have relatively low returns (compared to operational investments) from receiving external financing. 7.2.2.2 Credibility of clients/off-takers Most financial institutions mentioned concerns around the credibility of most private sector off-takers given the often very long time frames (10 years or more) involved. Sufficient revenues need to be generated to cover the cost of large, capital intensive projects - which typically requires a long period of stable returns. There are few industries in South Africa that can guarantee this, and the current poor performance of the mining and manufacturing industries adds to their perceived riskiness. This finding is supported by the literature review (see Appendix 4), where it was found that because of the long-term nature of large and capital-intensive low carbon investments where returns are closely tied to the operation of a specific plant (like co-generation for example), the prospects of the market in which a company operates is often viewed as more important than the current balance sheet of a borrower (see, for example, Cloete et al. (2016)). Perceived riskiness of local mining and manufacturing sectors reduce the willingness of financial sector entities to lend to companies in these sectors for the often very long periods required by low carbon investments. 7.2.2.3 ESCOs as a mechanism and instrument for financing The electricity supply crisis that started in 2007 and the various funding mechanisms mobilised to address it (including ESKOM DSM and IDM funding) has led to a greater emphasis on energy efficiency amongst heavy industrial companies. As shown in Section 7.1.1.2, this has led to the identification of a large number of relatively low investment energy efficiency options, which have mostly been financed and implemented internally. Sharply increasing electricity prices since 2007 (and the expectation that this will continue in future), continuing security of supply concerns (now linked to transmission and distribution infrastructure rather than a lack of supply), and steep reductions in the cost of renewable energy, have caused industrial companies to pay more attention to renewable energy as a way to reduce cost and enhance competitiveness. Various heavy industry stakeholders, however, mentioned a lack of ESCOs and other service providers of sufficient scale in South Africa willing to finance and operate energy efficiency and renewable energy projects as a barrier to low carbon investment. Despite this, stakeholders indicated that while most low carbon investment options have historically been funded internally, going forward the preferred implementation model for low carbon investment will be the use of ESCOs or other service providers to implement projects. Reasons for this include to: 118 Low carbon finance study (Phase 1 and 2) The World Bank • Ensure the funding remains off the balance sheet of the heavy industrial companies, • Access skills and expertise that were not core to operating activities, but which could provide significant efficiency improvements, • Share the capital cost and risk of implementing projects through a shared-savings model, and • Shift the burden of accessing relevant incentives and support mechanisms for low carbon initiatives to a third party with more experience in these areas. Changes to accounting standards may serve to accelerate the perceived role that ESCOs could play as a provider of projects and services, for both the heavy industry and financial sector.61 Numerous industrial stakeholders indicated that they would not be willing to be the sole off-taker to renewable energy projects in future, or enter into PPAs or other long-term contracts, where it would be difficult for the suppler to switch to other customers, because of the risk that this would have to be shown as a liability on their balance sheets. The declining attractiveness of these previously off-balance sheet funding arrangements means that the ability to supply multiple customers on a shorter-term basis through alternative mechanisms is becoming increasingly important to the design of larger-scale renewable energy projects. Aggregating low carbon investment projects from companies in different sectors on the balance sheet of well-capitalized ESCOs would also help to address the issue with off-taker credibility discussed above, and could thus serve as an intermediary between companies and the financial sector to access low carbon finance. It is thus not surprising that stakeholders saw support for the ESCO/service provider/project developer market as key to unlocking funding to low carbon investments.62 A key barrier, however, is the relatively nascent ESCO market, as reflected on in section 5.3.3. Consultations with both heavy industry stakeholders and the finance sector show that both sectors perceive there to be too few reputable ESCOs (based on track records that inspire confidence) of sufficient scale in the South African market, despite the significant opportunities for growth. 61 Financial stakeholders identified uncertainty regarding the impact of changes to the accounting standards for leases. Previously, firms could distinguish between operating and finance leases (and therefore avoid having to recognize certain liabilities on their balance sheets). A new accounting standard set to come into effect from January 2019 will require that lessees recognize a right-of-use asset and lease liability for all lease agreements. The new IFRS 16 accounting standard defines a contract as containing a lease if it “conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use” (Deloitte Global Services Limited, 2016, p. 1). This effectively requires firms to recognize on their balance sheets any agreements that could be classified as leases. This accounting standard can significantly impact on a firm’s choice of using on-balance sheet funding, project-based financing or external project developers and ESCOs. 62 Recommendations included increasing low cost finance to ESCOs/service providers and increasingly funnelling incentives for low carbon investment via ESCOS and project developers. 119 Low carbon finance study (Phase 1 and 2) The World Bank ESCOs are likely to play an important role as implementers and financiers of low carbon investments in future, and may help to overcome issues related to the credibility of clients/off-takers. However, a lack of reputable ESCOs with sufficient scale is currently acting as a barrier to low carbon investments. 8 POSSIBLE INTERVENTIONS A wide range of barriers to low carbon investment was mentioned during the stakeholder consultation process. In addition to the 16 categories of barriers that were most relevant to heavy industry stakeholders and that are shown Figure 63 in Appendix 8, a further 21 barriers were mentioned only once by stakeholders. This signals that a one-size-fits-all approach is unlikely to be able to support low carbon investments across sectors. It may be possible to develop programmes that effectively support one type of low carbon activity, as the REI4P did very effectively before political economy factors intervened, but a broad instrument that aims to support a range of low carbon activities is unlikely to be successful. This interpretation was supported by a representative of the IDC, who indicated that green finance at the IDC has been restructured from being a separate focus area, the now defunct Green Industries Strategic Business Unit, to a function that supports sector- or activity- focused business units (see IDC (n.d.) for an overview of the IDC’s current strategic business units). Various preliminary interventions were identified during the study, related to the gaps and barriers that have been identified. This may serve as the basis for the next phase of the study, where a more detailed review of possible policy and financial interventions will be undertaken. 8.1 Policy interventions 8.1.1 Understanding the low uptake of available incentives The large number of available mechanisms that could potentially support low carbon investments in South Africa paints a misleading picture of the actual level of public sector provided. This highlights the importance of putting mechanisms like a carbon tax or carbon budgets in place to increase the return from low carbon activities, and justifies a more in-depth assessment of why existing incentives are not been accessed, and how they could be refined, consolidated or replaced to more effectively support low carbon investments. 8.1.2 Supporting R&D in low carbon activities Almost 60% of the low carbon investment options identified as not attractive for funding was classified as such due to technologies or processes not having been proved locally. Unsurprisingly, funding for research, development and innovation was highlighted by stakeholders as important to ensure more low carbon investments materialise. 8.1.3 Supporting policy reform Both the high degree of policy and regulatory uncertainty, and technical capacity related to the administration of regulations and implementation of projects were identified as key factors inhibiting investment in low carbon activities. 120 Low carbon finance study (Phase 1 and 2) The World Bank There is thus a sound rationale for government to create a conducive climate for renewable energy self-supply, IPPs, wheeling and net metering to skew companies towards investing in renewable energy self-supply rather than cutting back their operations or moving towards jurisdictions with lower and/or more stable and predictable electricity tariffs. At the same time, it will be important to support capacity development initiatives at all spheres of government to alleviate bottlenecks in the administration and regulation of environmental and energy related policies. 8.2 Interventions targeting finance providers 8.2.1 Guarantee schemes Several corporate banks suggested that a guarantee scheme would be beneficial in raising their risk appetite, and allow them to invest in projects that would otherwise not be considered. One of South Africa’s larger corporate banks has also noted that it is in discussion with the IFC to provide a similar guarantee for ‘green’ projects. In terms of the guarantee schemes, the IDC is currently piloting a 50- 50 partial guarantee scheme offered by USAID. This scheme is not applicable to bankable projects and provides a guarantee of up to 50% of the loss. KfW Development Bank plays a similar role in de-risking the Facility for Investment in Renewable Small Transactions (see footnote 60). Other ‘first- loss’ guarantee and similar insurance mechanisms were also identified in consultations with financial sector stakeholders, as possible instruments to encourage investment in low carbon activities. 8.2.2 Green bonds As noted in Box 9, the utilisation, and issuance, of green bonds in South Africa remains relatively low. However, some participants in the financial sector suggest that these instruments could play a vital role in two ways. First, green bonds could be utilised as an effective mechanism to pool / securitise low carbon investments and allow investors to better match their tenor, risk and return criteria across a range of green bond maturities. Second, historically ‘dirty’ (high carbon emitting) firms that continue to have strong balance sheets could potentially access relatively cheap finance for smaller low carbon initiatives by issuing green bonds. The key for this appears to be the ability to verify and ensure that finance provided through green bonds is ring-fenced for ‘green’ activities. 8.2.3 Creating investment portfolios Discussions with the financial sector suggested that key to increasing investment in low carbon and green projects was increasing economies of scale and enhancing the ability to match a project’s payback period with the tenor limits imposed by different funders. To achieve this some corporate banks are exploring the creation of project portfolios that pool these investments and allow for a ‘cookie-cutter’ approach to matching portions of the overall pool with specific investment constraints and criteria. This securitisation and portfolio approach is increasingly being seen as a way of reducing overall risk and achieving economies of scale. Related to this, some corporate banks are also exploring different re-financing approaches to try and ensure that they can match their relatively short-term tenor limits with long-term payback periods for low carbon projects. Financial institutions considered these approaches confidential in nature (as 121 Low carbon finance study (Phase 1 and 2) The World Bank part of their competitive intellectual property), however, part of this approach appears to focus on creating investment pools. In this way the level of financing, risk and cost can be better segmented and matched to lenders’ requirements, while ensuring that the overall pool is large enough to be attractive to corporate lenders. 8.3 Interventions targeting the energy market As mentioned above, aggregating low carbon investment projects from companies in different sectors on the balance sheets of well-capitalized ESCOs could address the issue with off-taker credibility discussed above, and could thus serve as an intermediary between companies and the financial sector to access low carbon finance. Coupled with their ability to combined small low carbon investment options into larger investment programmes that can be undertaken profitably, and the greater demand for ESCOs to enable companies to keep low carbon investments off their balance sheets, this points towards ESCOs being an important conduit for low carbon finance in future. At present, however, there are relatively few sufficiently well-capitalised ESCOs with long track records in South Africa. It may thus be appropriate to use credit enhancements, direct equity injections, or other mechanisms to increase the credit worthiness and deployment capacity of ESCOs operating in South Africa, and to incentivise more companies to enter the market. 9 CONCLUSION This working paper has illustrated the complexity surrounding the finance of low carbon investments in heavy industry in South Africa at a time when these sectors are struggling. It has, however, also shown that these sectors remain integral to South Africa’s economic development objectives, and that stakeholders believe that undertaking low carbon investments are vital to their future competitiveness. A combination of falling renewable energy costs, a greater emphasis on energy efficiency, and sharply increasing electricity prices has caused low carbon investments to move from being viewed as an environmental sustainability issue, to being considered strategic long-term investments. Numerous gaps and barriers to the financing of these investments remain, however; and these differ by sector and type of investment. Addressing these gaps and barriers will not be easy, but this working paper has identified several promising interventions that require further analysis and thought. Should these interventions be successfully implemented, they could have a significant positive impact on both the GHG emissions and development trajectories of heavy industry in South Africa. 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These include the UN Framework Convention on Climate Change (UNFCC) (ratified in 1997), and the Kyoto Protocol (ratified in 2002). Beyond its low carbon growth commitments, the country originally embraced the green economy as part of a broader sustainable development objective in the 2008 Framework for Sustainable Development (NFSD). Concrete action plans were subsequently established through the National Sustainable Development Action Plan (NSSD1). Following the global financial crisis, national discourse on the green economy gained momentum in response to the Global Green New Deal (GGND) (tabled for the 2009 UNEP Green Economy Initiative). This encouraged government support for economic transformation to create green jobs, promote sustainable and inclusive growth and accelerate achievement of the Millennium Development Goals (UNEP, 2009). The GGND guidelines and the repercussions of the global financial crisis led to a large number of broad-based key policies, frameworks and strategies that support the green economy initiative. Although South Africa has no stand-alone policy document on climate mitigation and sustainable growth, the policies and strategies outlined in Figure 59 help shape the country’s green economy priorities. Figure 59: Policy framework and green economy sector initiatives in SA National Climate Change Response White Paper (2011) Sustainable Development Action Plan (2011) New Growth Path / Green Economy Accord (2011) National Development Plan (2013) Medium Term Strategic Framework (2014-2019) National Agriculture and Integrated Environmental Bio-Economy Biodiversity Rural Development Resource Plan Fiscal Reform Strategy (2013) Strategy and Action Plan (2011) (2011) Policy Paper (2006) Plan (2005) Industrial Policy National Waste 10-Year Innovation National Transport Renewable Energy Action Plan Management Plan (2007) Master Plan (2007) Strategy (2003) (Various) Strategy (2011) National Skills White Paper on National Water Energy Efficiency Green Economy Development National Transport Resource Strategy Strategy (2005) Accord (2011) Strategy III (2013) Policy (1996) (2013) Source: Adapted from UNEP Green Economy Scoping Study (UNEP, 2013) and various other sources Selected policies are outlined in Table 55 which elaborates on policy actions, and where possible indicators and key actions are identified. As mentioned in Section 1, South Africa’s NDC provides an estimate of the resources required to achieve it. It is however relatively mum on the mechanisms though which the resources will be deployed, and largely sticks to generalities like rolling out ‘programmes’ and ‘transforming’ the energy mix. It does, however, refer to the REI4P (INDC, 2015). 142 Low carbon finance study (Phase 1 and 2) The World Bank Table 55: Summary of selected state-led policies and initiatives geared towards climate change Initiative and/or Green economy Specific green Policy goals and objectives Green economy focus framework indicators/outcomes economy commitments • Progress on the implementation of It is a proactive strategy that regards sustainable development as a long-term nine green economy programmes: • IDC ring-fenced R11,7 commitment, which combines environmental protection, social equity and impact on jobs, industry development National Strategy for billion economic efficiency with the vision and values of the country. It is an ongoing and ecosystem benefits Sustainable • DBSA: R25 billion process of developing support, and initiating and upscaling actions to achieve • Financial resources for green Development 2011- • National Treasury sustainable development in South Africa. economy investments 2014 (NSSD1) R800 million Transition towards a green economy is identified as one of the five strategic • Registered innovation is the form of (DEA, 2008) priorities of NSSD. The objective of the priority is to facilitate a fair transition • Private Sector > R100 intellectual property billion towards resource efficiency, low carbon and pro-employment growth path. • Share of GDP of the Environmental Goods and services • Near term actions (by 2015): development of market based The National Development Plan is instruments, partnerships for South Africa’s long-term overarching Chapter 5 of the NDP tables a vision for adaptation and mitigation actions, development plan. South Africa to transition towards a low implement Carbon Tax, and It is a ‘framework for economic policy as carbon, resilient economy and a just investments into R&D, infrastructure National the driver of the country’s jobs strategy’, society • Medium term actions (by 2020): Development Plan and specifically aims to maximise the The path to achieving the vision Establish a culture of energy (NDP),2011 creation of ‘decent work opportunities’ N/A requires long-term strategies and steps efficiency, embed resilience planning (National Planning by focusing on labour-intensive sectors to reduce dependency on carbon, in all planning processes, carbon Commision, 2011) and increasing investment in labour- natural resource and energy while budgets approach an important absorbing activities. Its ultimate goal is balancing objectives to increase element to policy development to grow employment by 5 million jobs by 2020, in order to narrow employment and reduce inequality • Long-term actions (by 2030): unemployment from 25% to 15%. Earlier investments are paying off and resulting in inclusive economic growth • Employment targets: 300 000 • Commitments were Government adopted the New Growth additional direct jobs by 2020, of made by various Path (NGP) as the framework for which 80 000 in manufacturing and stakeholder to : set New Growth economic policy and the driver of the The NGP identities the green economy the rest in construction, operations aside capital allocation, Path(NGP) (Accord country’s jobs strategy. The key drivers as one of the six key sectors to drive and maintenance, rising to well over provide incentives 4: Green Economy of employment creation identified in the industrial development and job creation. 400 000 by 2030 through regulation, and Accord), 2011 New Growth Path are: The Accord prioritised manufacturing • Achieved though commitments into build capacity and skills (Economic • Substantial public investment in and green industries through a 12 thematic area such as renewable towards a green Development infrastructure to create localised strategy. Aggressive energy-solar water heating, energy economy Department, 2011) employment both directly and investments commitments are made. efficiency, waste recycling • The timelines for the indirectly by improving efficiency programmes, green buildings & bio- commitments range across the economy; fuels etc. from the near term 143 Low carbon finance study (Phase 1 and 2) The World Bank Initiative and/or Green economy Specific green Policy goals and objectives Green economy focus framework indicators/outcomes economy commitments • Targeting more labour-absorbing (2016) and the medium activities in the main economic term (2020). sectors, notably the agricultural and mining value chains, manufacturing and services; • Taking advantage of new opportunities in the knowledge and green economies; • Leveraging social capital and the public service; and • Fostering rural development and regional integration. • Emphasis on green industries, The Industrial Policy Action Plan is a renewable energy and energy key pillar in the implementation of the efficiency sectors. New Growth Path. The plan stems from • Highlights the need for new the 2007 National Industrial Policy The IPAP prioritises growth in green procurement regulations and Framework, which set out and energy saving industries trough the Industrial Policy industrial financing government’s long-term approach to design of industry specific incentives. Action Plan (first and industrialisation. The IPAP aims to strike a balance • Outcomes include: a low carbon N/A subsequent roadmap for the manufacturing The first plan was released in 2007 between creating and growing new versions) sector, increased local content and, since 2010, the plan has been sectors whilst stabilising and revised annually. The most recent IPAP rejuvenating existing industries. threshold for renewable sector, & (2016/17 – 2018/19) aims to focus designated energy-efficiency interventions in 13 sectors in the broad products in support of the manufacturing industry. development of a competitive local manufacturing industry. • The NCCRP outlines the county’s approach to mitigation and Effectively managing inevitable climate change impacts through building resilience adaptation and frames priorities in and response capacity; and making a fair contribution to the global effort to National Climate terms of key near term priority stabilise greenhouse gas (GHG) concentrations. Change Response flagship programmes The NCCRP aims to promote investment in human and productive resources that Policy • The document calls for a reduction in N/A will facilitate the growth of the green economy. (NCCRP), 2011 greenhouse gas, ensuring The NCCRP states that government will have to increase the mobility of labour (DEA, 2011a) community and ecosystems and capital out of carbon intensive sectors and industries and move towards resilience and reducing dependency greener productive sectors and industries. on fossil fuels. South Africa’s The South African NDC provides adaptation strategies of six goals as well as • Development of national adaptation Ensure commitment to Nationally adaptation plans, costing of adaptation investment requirements, equity, and plan, an early warning vulnerability the Paris Agreement Determined means of implementation. The mitigation component of the INDC Peak, plateau and adaptation monitoring system 144 Low carbon finance study (Phase 1 and 2) The World Bank Initiative and/or Green economy Specific green Policy goals and objectives Green economy focus framework indicators/outcomes economy commitments Contribution (INDC, and decline (PPD) is a GHG emissions trajectory range which is supported vulnerability assessment and 2015) through the carbon tax policy. adaptation needs framework • Achieve peak, plateau and decline GHG emissions trajectory range Legislative profile to provide for the imposition of a tax on the carbon dioxide (CO2) • A proposed tax design that is neutral Draft Carbon Tax equivalent of greenhouse gas emissions; and to provide for matters connected on the electricity price and revenue Bill, 2015 (Minister of therewith. N/A neutral from a macro-economic Finance, 2015) The tax puts a price on carbon by obligating the polluter to internalise the external perspective costs of emitting carbon. Source: Policy Documents and (Nhamo, et al., 2014) 145 Low carbon finance study (Phase 1 and 2) The World Bank APPENDIX 2 DATA CLASSIFICATION FOR SECTOR ANALYSIS To provide more detail in terms of trade trends, the analysis utilised product level trade data. Because the concordance between trade statistics and production / output data is not be exact, there will be some differences between trade trends identified through trade statistics and the trends identified in production, output and market data. Products were identified for each industry sector, using either the Central Production Classification (CPC) or the Harmonised System (HS) nomenclature.63 Table 56: Level of aggregation of data provided Production and capacity utilisation data* Market data (exports / imports / local market) Does data substantially Does data Heavy industry sector represent substantially SIC code SIC code Level of aggregation heavy Level of aggregation represent heavy aggregation aggregation industry industry sector sector identified? identified? Coal Mining of coal and ignite SIC 210 Yes Mining of coal and ignite SIC 210 Yes Precious PGMs = SIC metals Platinum group metals, Gold 2424, Gold and Yes (PGMs and and uranium uranium = SIC Gold) 230 Mining Chromite Chrome SIC 2421 Yes Mining of gold and uranium SIC 23, 24 Yes, in aggregate or, mining of metal ores Iron Ore Mining of iron ore SIC 241 Yes Manganese Manganese SIC 2423 Yes Other metal ore mining, except Vanadium SIC 2429 No gold and uranium Manufacture of chemical Manufacture of basic chemicals SIC 334 Yes basic chemicals, Processing SIC 333, 334 No / not clear of nuclear fuel Chemicals Manufacture of other Manufacture of other chemical chemical products, SIC 335 Yes SIC 335, 336 Yes / likely products Manufacture of man-made fibres 63The trade data provided also excludes South Africa’s trade with the rest of the Southern African Customs Union (SACU). This is because South Africa has only included trade with SACU in its official trade statistics since 2013, and this inclusion distorts the overall trade trends before and after 2013. 146 Low carbon finance study (Phase 1 and 2) The World Bank Production and capacity utilisation data* Market data (exports / imports / local market) Does data substantially Does data Heavy industry sector represent substantially SIC code SIC code Level of aggregation heavy Level of aggregation represent heavy aggregation aggregation industry industry sector sector identified? identified? Refining Manufacture of coke oven Manufacture of coke oven products, Petroleum SIC 331, 332, Yes likely, in Petroleum CTL products, Petroleum SIC 331, 332 Yes, in aggregate refineries/synthesisers, 333 aggregate refineries/synthesisers GTL Processing of nuclear fuel Manufacture of non-metallic Manufacture of non-metallic mineral products (includes mineral products (includes Cement ceramic, clay, cement, stone SIC 342 No / not clear ceramic, clay, cement, stone SIC 342 No / not clear and related articles, as well and related articles, as well other non-metallic products) other non-metallic products) Iron and steel Yes Manufacture of basic iron Yes, likely Manufacture of basic iron and Ferrous SIC 351 and steel (includes ferrous SIC 351, 353 steel (includes ferrous alloys) No No alloys alloys), Casting of metals Manufacture of basis precious Manufacture of basic and non-ferrous metals precious and non-ferrous Non-ferrous Aluminium (includes precious metals, SIC 352 No / not clear metals (includes precious SIC 352 No / not clear metals aluminium and other non- metals, aluminium and other ferrous metals) non-ferrous metals) Manufacture of glass and glass Manufacture of glass and Glass SIC 341 Yes SIC 341 Yes products glass products Manufacture of paper and Manufacture of paper and Pulp and paper SIC 323 Yes SIC 323 Yes paper products paper products * Capacity utilisation data is only available for the manufacturing sector. 147 Low carbon finance study (Phase 1 and 2) The World Bank APPENDIX 3 DESCRIPTION OF LOW CARBON INVESTMENT OPTIONS Table 57: Description of options for Aluminium Mitigation measures Description Energy efficiency Best process selection To minimise energy consumption and emissions, include computer control of the electrolysis for primary aluminium process based on active cell databases and monitoring of cell operating parameters to smelting minimise the energy consumption and reduce the number and duration of anode effects, and an established system for environmental management, operational control and maintenance. Energy Monitoring and Management System Improved process control Improved electric motor For example, compressors, pumps and fans system controls and VSDs Energy efficient utility For example, lighting, refrigeration, compressed air systems Lower electrolysis Currently, electrolysis is performed at 1233 K (melting point of Aluminium is 933 K). As a result, temperature the temperature of electrolysis can be reduced to closer to the melting point of aluminium Application of a A minimum distance is required between the anode and the cathode in order to avoid short- dynamic AC magnetic circuiting. However, as the distance increases the resistance increase resulting in an increase field in electricity use. The use of a dynamic AC magnetic field allows for a smaller separation distances and as a result lowers electricity use. Technology substitution Convert existing Replace Centre Worked Prebake (CWPB) technology with Point feed Prebake (PFPB) technology to PFPB technology. In the prebake cells, the pots use multiple nodes that are formed and baked prior technology to consumption in the pots. The prebake technology has essentially two variants based on how alumina is fed to the cell, i.e. where the pot working (crust breaking and alumina addition) takes place. In the CWPB cells, alumina is fed along the longitude centre line of the cell, whereas in SWPB technology, alumina is added along the longitudinal sides of the cells. A third variant of the prebake is defined as Point feed Prebake (PFPB) to represent the state-of-the-art technology in primary production. In comparison to CWPB, PFPB has a distinct method of feeding alumina into the cell, i.e. a point feed system, which enables more precise process control of alumina concentration in the bath, produces less sludge and stabilises the temperature. These features allow higher current efficiency, lower energy consumption, and lower emissions. All the new plants are using point feed. Wetted drained Wetted drained cathodes, of titanium diboride, allow for molten aluminium to be continually cathodes drained from the cell. The distance between the anodes and the cathode is reduced which reduces both resistance and energy consumption of the cell Inert Anodes The use of inert anodes in the smelting process increases energy consumption but decreases CO2 emissions. Wetted cathodes are a prerequisite for inert anodes. Carbothermic reduction High temperature carbothermic reduction of alumina is a non-electrochemical process that has been researched extensively over the last 45 years. Production pathway shift Switch to secondary Switch production pathway from primary to secondary. Secondary aluminium production using production and recycled scrap raw material requires significantly less energy compared to primary aluminium increase recycling production. World demand for secondary aluminium is estimated to increase at annual rate of 5%, about twice of that of primary, at 2.4%. Limited by availability of scrap raw material. Electricity generation 148 Low carbon finance study (Phase 1 and 2) The World Bank Clean on-site power Implement onsite clean energy generation (e.g. PV, hydro, wind etc.) generation Table 58: Description of options for Cement Mitigation measures Description Energy efficiency Improved process control Optimisation of the clinker burning process is usually done to reduce the heat consumption, to improve the clinker quality and to increase the lifetime of the equipment (the refractory lining, for example) by stabilising process parameters. Reduction of clinker content of Reduction of clinker content of cement products by adding fillers and additions, (e.g. cement products sand, slag, limestone, fly ash and pozzolana, in the grinding step). Energy monitoring and Includes power planning and load shifting management system Improved electric motor system For example compressors, pumps and fans controls and variable speed drives Energy-efficient utility systems For example lighting, refrigeration, compressed air Technology substitution Implement kiln systems with Implementation of energy efficiency measures including reduction of thermal energy multistage cyclone preheaters use, selection of energy optimised process kiln systems with multistage cyclone and precalciner preheaters (e.g. four to six stages) and precalciner Fluidized bed cement kiln in fluidized bed kiln, a rotary kiln is replace by a vertical stational cylindrical vessel. Expected advantages include: lower CAPEX, lower temperatures, lower NOx emissions and lower energy use Electricity generation Waste heat recovery from kilns Energy recovery from kilns and coolers for cogeneration (e.g. Conventional steam and coolers/cogeneration cycle process and Organic Rankine Cycle (ORC) process). Furthermore, excess heat is recovered from clinker coolers or kiln off-gases for district heating. Fuel switch Utilise waste material as fuel Substitution of fuels with different hazardous and non-hazardous wastes materials with high enough calorific value and low moisture content (e.g. Wood, paper, cardboard, Textiles, Plastics, RD, Rubber/tyres, Industrial sludge, Municipal sewage sludge, Animal meal and fats, Coal/carbon). Utilise natural gas Switching from coal and petcoke to natural gas Production pathway switch Geopolymer cement production Geopolymer cement is cement manufactured with chains or networks of mineral molecules producing 80–90% less CO2 than Ordinary Portland Cement (OPC) - the most common type of cement, consisting of over 90% ground clinker and about 5% gypsum. CSA Belite Cements Calcium sulfo-aluminate (CSA) cements have been manufactured in China for over 20 years. CSA cements are produced by sintering industrial wastes such as fly ash, gypsum and limestone in rotary kilns Magnesium oxide cements This process involves the producing magnesium clinker based cement. It is estimated that the manufacturing process would emit around 0.5 tonnes CO2 per tonne produced. However, the cement has the potential to absorb up to 1.1 tonnes of CO2 in the service condition. CCS 149 Low carbon finance study (Phase 1 and 2) The World Bank CCS - back-end chemical Carbon capture and storage (CCS) could enable up to 95% reduction of CO2 absorption emissions from cement production. about 67% of the emissions originate from limestone decomposition into cement clinker and 33% from fuel combustion. The CO2 from limestone off-gas (25% to 35% CO2) can be captured using three approaches: back-end chemical absorption; oxyfueling; and chemical looping. Post-combustion capture could be used for new cement kilns as well as for retrofitting existing kilns, whereas oxy-combustion would only be available for new cement kilns. Full-scale CCS demonstration projects are expected between 2020 and 2030 and commercial deployment after 2030. It is estimated that between 10% and 43% of the global cement capacity could be equipped with CCS in 2050. CCS - oxyfuelling Oxyfuel technology uses oxygen instead of air in cement kilns, would result in a comparatively pure CO2 stream. Using oxygen (oxyfuel) instead of air in new cement kilns with pure CO2 off-gas might reduce the cost as the kilns productivity would be much higher than that of conventional kilns, but the process require more R&D. Oxy- combustion would only be available for new cement kilns. Table 59: Description of options for Chemicals Option Description Energy efficiency Revamp: increase capacity and Example based on the revamp of a 20 year old reduced primary reforming energy efficiency ammonia plant (1100 tonnes/day). Measures included improve the efficiency of the primary reformer furnace/gas turbine combination by extensive preheating of the mixed feed going to the furnace, installation of a highly efficient gas turbine, modifications of the burners, rearrangement of the convection coils and add additional surface, and improved maintenance (about 50 % of the efficiency increase is achieved by re-establishing the original state of the plant, e.g. closing leaks). Assumed to be widely applicable to other chemicals production plant. Energy monitoring and management Monitoring of key performance parameters creates the basis for improvement system strategies and allows benchmarking. Advanced process control Advanced process control (APC) systems have been successfully implemented in an ammonia plant in 2004, but this is generally applicable to many chemical production processes. The APC is model-based or model predictive and the implementation did not have a significant negative effect on operation nor was a plant shutdown caused or required. With the APC on-line in the example plant, the production is stable at record-high levels. Significant cost benefits. In the example plant, the payback actually started already during the initial phase of project where the complete control and operating strategy of the plant was revised and reconsidered. Improved electric motor system Improved electric motor system controls and variable speed drives (e.g. controls and VSDs compressors) Energy efficient boiler systems and Energy efficient boiler systems and kilns kilns Energy efficient utility systems Energy efficient utility systems (e.g. lighting, refrigeration, compressed air) Increase process integration and Increase process integration and improved heat systems (including heat improved heat systems exchanger efficiencies). Increasing process integration leads to improved energy efficiency, cost savings and savings in demineralised water. The efficiency of heat exchangers is affected after years of operation by build-up of dirt and corrosion. Maintenance of internal or external heat exchangers ensures that heat is removed efficiently from the converter and, hence, enables optimum catalyst activity. Where heat exchangers cannot be cleaned, replacement has to be considered. 150 Low carbon finance study (Phase 1 and 2) The World Bank Option Description Membrane separation There are a wide variety of applications for selective membranes for a number of production processes. Separation is an energy-intensive stage of production and membranes can reduce energy consumption required Fuel switch Replace coal-fired partial oxidation Implement per tonne of ammonia the energy requirement for coal based plants processes with natural gas-fired is significantly higher than that for natural gas-fired facilities. A coal-based unit steam reforming production also produces roughly 2.4 times more CO2 per tonne of ammonia than a natural gas-based unit. The natural gas-powered steam reforming process uses 28 GJ/t ammonia of energy and produces emissions of 1.6 CO2 t/t ammonia compared to 42 GJ/t ammonia and 3.8 CO2 t/t ammonia for coal-powered partial oxidation. Oxidation of energy efficiency measures including reduction of thermal energy use, selection of energy optimised process kiln systems with multistage cyclone preheaters and precalciner. Use of hydrogen from renewable The generation of hydrogen is one of the largest energy-consuming steps in sources producing the precursors to ammonia and methanol. Using hydrogen from renewable sources will reduce the GHG emissions of these processes. Biomass as a feedstock The use of biomass as a feedstock for chemical products. CCS CCS for new ammonia production In the chemical and petrochemical industry, processes such as ethylene, plants process emissions propylene, and aromatics production by steam cracking, methanol and olefins processing, chlorine, sodium hydroxide and ammonia production account for some 67% of the CO2 emissions. Important sources of CO2 also are steam boilers and combined heat and power (CHP) plants. In high-temperature steam cracking, the CO2 capture is based on chemical absorption as the off-gas is a mix of CH4 and H2, with a low CO2 concentration. Ammonia production (a large source of CO2, 1.5-3.0 tCO2/t of ammonia) provides high-purity CO2. In most ammonia production plants, a part of the CO2 is used for producing urea-based fertilizers (0.9 tCO2/t of urea) while the rest offer relatively low-cost CCS opportunity where the CO2 is separated from H2 using solvent absorption. Pure stream CO2 syngas already captured in South Africa ammonia production. GHG Emissions abatement N2O abatement for new production N2O emissions removal efficiency of 98-99% can be achieved using various plants measures (e.g. Non-selective catalytic reduction (NSCR), Combined NOx and N2O abatement reactor and N2O decomposition in the oxidation reactor etc.). Electricity generation Tail-gas energy recovery for Use high efficiency combined heat and power (CHP) to supply power and heat combined heat and power plant for production. The recovery of the energy generated by tail-gas could be of great (CHP) and minimise flaring [Carbon benefit to the carbon black plant and would enable it to make use of the energy black plant] thus produced, whether it be electric or thermal. The potential energy that can be recovered is dependent on the calorific value of the tail-gases and varies between 17 and 30 GJ/tonne carbon black produced. Waste heat and/or gas energy Waste heat and/or gas energy recovery and utilisation for cogeneration recovery and utilisation for cogeneration Combined heat and power (CHP) Combined heat and power (CHP) 151 Low carbon finance study (Phase 1 and 2) The World Bank Table 60: Description of options for Coal Mitigation measures Description Energy efficiency Improve energy efficiency of The mining industry has identified many energy savings in diesel using activities. These mine haul and transport include payload management, managing intersections, gradients and distances operations travelled through better mine planning and idle time management Process, demand and energy Monitoring - Real time monitoring and display of demand loads and energy consumption management system at the BU's control centres. Management System - Energy Database access to end users that shows process level details on daily basis for management. Power Factor Correction - Reduce the reactive load to increase plant PF levels Energy efficient lighting Replace inefficient lighting with efficient FLs and LEDs Install energy efficient electric Replace old, inefficient electric motors (e.g. circuits, grinding, transport, compressors, motor systems pumps and fans etc.) with energy efficient motors. Optimise existing electric Optimise existing electric motor system control and install variable speed drives on part motor systems (controls and load systems to match load with demand (e.g. circuits, grinding, transport, compressors, VSDs) pumps and fans etc.) Fuel switch Use of 1st generation Use of 5% biodiesel (B5) for transport and handling equipment/open pit mobile biodiesel (B5) for transport machinery and handling equipment Use of 2nd generation Use of 50% biodiesel (B50) for transport and handling equipment/ open pit mobile biodiesel (B50) for transport machinery and handling equipment Use of 2nd generation Use of 100% biodiesel (B100) for transport and handling equipment/open pit mobile biodiesel (B100) for transport machinery and handling equipment Electricity generation Coal mine methane recovery Recovery and utilise medium concentrations of coal mine methane (that would normally and utilisation for power be vented) and utilise for power and/or heat generation. Due to lower quantities and and/or heat generation concentrations of methane in South Africa, application may be limited. Onsite clean power Implement onsite clean energy generation (e.g. PV, hydro, wind etc.) generation GHG Emission Abatement Coal mine methane recovery Coal mine methane recovery and destruction by flaring and destruction by flaring Table 61: Description of options for Coal to Liquid Mitigation measures Description Energy efficiency Upgrade feed compressors Upgrade of primary electric motor driven equipment can achieve significant electricity savings. Reference project at Sasol Synfuels in 2004 has resulted in direct electricity savings equivalent to 20MW of instantaneous power consumption. Energy monitoring and management systems Improved process control 152 Low carbon finance study (Phase 1 and 2) The World Bank Improved electric motor system Improved electric motor system controls and VSDs controls and VSDs Energy efficient boiler systems Energy efficient boiler systems and kilns, including replacement of old boilers with new. and kilns Energy efficient utility systems Energy-efficient utility systems (e.g. lighting, refrigeration, compressed air) Improved heat systems Improved heat systems utilising waste heat/steam and spare steam turbine electricity generation capacity, to generate additional power generation and including improved exchanger efficiencies etc. Fuel switch Conversion of feedstock from Converting feedstock from coal to natural gas can reduce emissions by 75%. coal to natural gas Reference projects include i) the Secunda facility conversion in 2004 which has achieved a saving of 2342 kTCO2 eq/year or 84.5 kTCO2 eq/PJ synfuel ii) at the Sasolburg conversion commissioned in 2004 resulting in 4700 kTCO2 eq/annum reduction. Uptake limited by access to gas feed. Electricity generation Increase onsite gas-fired power Installation of most efficient gas turbine power generation equipment onsite to reduce generation - using gas turbines imports of carbon intensive grid electricity. Reference project is the commissioning of 2 x 100MW Open Cycle Gas Turbine (OCGT) generators operating in open cycle at Secunda facility replacing equivalent of 200MWs of grid electricity. Uptake limited by access to gas fuel. Could secure supply from National LNG supply infrastructure. Increase onsite gas-fired power Installation of most efficient gas turbine power generation equipment onsite to reduce generation - using internal imports of carbon intensive grid electricity. Reference project is the installation of combustion engines 140MW internal combustion gas engine power plant installed achieving 1,742 kTCO2 eq/annum saving. Uptake limited by access to gas fuel. Could secure supply from National supply LNG infrastructure. Waste heat recovery power Recovery of waste process heat and utilise for onsite electric power generation generation replacing consumption of carbon intensive grid electricity purchases from Eskom. Reference projects include Sasol Synfuel's wet sulphuric acid plant implemented in 2009 utilising excess process steam for onsite power generation resulting in a reduction in Eskom imports of 9.1MW instantaneous power and installation of 2 x 145t/h heat recovery steam generators utilising waste heat from gas turbine power cycle generating additional 68MW of instantaneous power consumption. Waste gas recovery and Recovery of waste process gas (e.g. rectisol methane) and utilise for thermal/heat utilisation demand on site. CCS CCS - CO2 capture and CO2 capture and compression is the 1st stage of Carbon Capture and Storage (CCS). compression CCS can capture, compress, transport and store up to 99% of CO2 emissions. CTL/GTL industry can separate and recover CO2 relatively easily due to high purity steams of CO2 in the production process and therefore prevent process CO2 emissions at a much lower abatement costs (than compared to CO2 flue gas capture technologies).CCS costs estimates vary from 60 - 100 US$/tCO2 (IEA). CTL/GTL cost could be a low as 11 US$/tCO2. CO2 ould also be captured from flue gas emission, however this will be much more expensive to implement. CCS - process emissions from CO2 capture and compression is the 1st stage of Carbon Capture and Storage (CCS). existing plants (storage CCS can capture, compress, transport and store up to 99% of CO2 emissions. onshore) CTL/GTL industry can separate and recover CO2 relatively easily due to high purity steams of CO2 in the production process and therefore prevent process CO2 emissions at a much lower abatement costs (than compared to CO2 flue gas capture technologies). CCS costs estimates vary from 60 - 100 US$/tCO2 (IEA) [5], including Capex, compression, transport and storage. CTL/GTL cost could be a low as 11 US$/tCO2. CO2 could also be captured from flue gas emission, however this will be much more expensive to implement. CO2 transport and storage 2nd stage of CCS. Mitigation potential physically limited to national geological storage capacity in South Africa. It is likely that CO2 storage capacity will be filled by recovered process CO2 (before flue gas CO2 is recovered). 153 Low carbon finance study (Phase 1 and 2) The World Bank CCS - process emissions from As above. Except captured CO2 transported and stored offshore so costs increases, existing plants (storage but capacity not limited as much. offshore) CCS - process emissions from As CCS - existing facilities (storage onshore) above. Except captured CO2 new plants transported and stored offshore so costs increases, but capacity not limited as much. Capture Capex costs are assumed to be 75% of existing plant, Table 62: Description of options for Ferroalloys Option Description of selected low carbon investment options Energy efficiency Implementing best available Implementing best available production techniques including improved raw material production techniques handling and storage, improved pre-processing of raw materials (e.g. wet grinding, filtering and pelletising systems) and improved core processes (e.g. preheating charge materials, transfer distances after preheating or prereduction to smelting should be as short as possible to avoid heat losses). Energy monitoring and Energy monitoring and management system management system Improved electric motor system Including for example, compressors, pumps and fans. controls and VSDs Energy efficient utility systems Energy efficient utility systems Improved heat exchanger Improved heat exchanger efficiencies efficiencies Technology substitution Replace submerged arc furnace Closed submerged arc furnace (SAF) can use 20% less over energy (including semi-closed with closed type electricity and potential energy in reductants agent) compared to semi-closed SAF. Conversion may not be possible due to 'locked in' furnace technology and cost. Electricity generation Waste gas recovery and power Recovery of carbon monoxide (CO) in waste gas from closed furnaces for the generation - CO from closed utilisation of power generation (70-90% CO). Electricity can be used in the furnace process/sold 'over the fence'. Various power generation technologies are available, eg: Internal combustion engines (waste CO gas, most widely used currently), Gas turbines (waste CO gas), Combined cycle gas turbine (waste CO gas), Rankine Cycle steam turbine (waste CO gas), Organic Rankine Cycle (waste CO) . CO can also be used as process fuel to replace fossil fuels. Waste heat recovery - from semi- Recovery of waste process heat primarily from semi-closed furnace flue gas for the closed furnace - Rankine Cycle purpose of power generation. Other sources of waste heat from air pollution control equipment and cooling of hot material. Various waste heat recovery to power generation techniques exist. The most widely used are: Rankine cycle steam turbine (waste heat recovery) Waste heat recovery- from semi- Recovery of waste process heat primarily from semi-closed furnace flue gas for the closed furnace - Organic purpose of power generation. Other sources of waste heat from air pollution control Rankine Cycle equipment and cooling of hot material. Various waste heat recovery to power generation techniques exist. The most widely used are: Rankine cycle steam turbine (waste heat recovery) On-site clean power generation Implement onsite clean energy generation (e.g. PV, hydro, wind etc.) Fuel switch Use biocarbon reductants Use biocarbon reductants (e.g. charcoal and wood) instead of hydrocarbon instead of coal/coke reductants (e.g. coke and coal) within the smelting process. 154 Low carbon finance study (Phase 1 and 2) The World Bank Table 63: Description of options for Glass Mitigation measures Description Energy efficiency More Efficient Performance of the forehearth is rated by the range of pull rates and gob temperatures within Forehearths which the system is able to maintain an acceptable degree of homogeneity, the speed of response of the forehearth, and its ability to maintain temperature stability. Its roofblock shape, the number, the position and the size of exhausts, the degree of controllability of the combustion and cooling exhausts, and uniformity in temperature and viscosity distribution are important parameters in designing an efficient forehearth. In general, electric or new forehearths are more energy efficient than older models. One efficient design is electric forehearth with indirect cooling. Heat is generated by electrodes in the glass melt while cooling is provided via indirect radiation by feeding cool air through the forehearth in ducts. Control systems regulate both the heating and cooling. Vertically fired Instead of firing horizontally, these furnaces direct the flames almost vertically down onto the furnaces batch surface. This melting system can supply more energy per square foot of batch surface area without increasing refractory temperatures beyond normal operation limits. Hence, the furnace can melt more glass and/or a higher quality glass in a given size furnace. Conversion to vertical fired furnaces, combined with oxygen boosting, have shown to provide a pure rate increase in excess of 50%, without affecting emissions or glass chemistry but reducing defects. Oxy-fuel Furnaces Oxy-fuel melting involves the replacement of the combustion air with oxygen (>90 % purity). The technique can be used with either natural gas or oil as the fuel, although the use of gas is more common. The technique potentially involves on-site energy savings, because it is not necessary to heat the atmospheric nitrogen to the temperature of the flames. Less combustion air has to be heated and therefore less energy is lost with the furnace waste gases . The energy savings of converting to an oxy-fuel furnace depend on the energy use of the current furnace, use of electric boosting, air leakage, glass type, and cullet use . Moreover, the indirect energy – the efficiency of the waste gas heat recovery system (recuperator, regenerator, etc.) and the energy required to produce the oxygen (can be between 0.4 – 1 kWh/Nm3) – related to oxy-fuel systems need to be taken into consideration. Besides reducing energy consumption oxy-fuel burning is a very effective method for reducing NOx emissions. Virtually in all segments of the glass industry, 100% oxy-fuel combustion technology has been successfully demonstrated. Oxy-fuel technology also offer other advantages including increased productivity (15-20%), noise reduction, reduced melting times, and glass quality improvements due to smaller variations in the product. Disadvantages may include increased refractory wear, which may affect the product quality by increasing silica corrosion at the crown of the furnace, and decreased furnace life (or increased refractory costs), oxygen production costs, and potential problems related to conversions from regenerative furnaces. Batch and cullet pre- Batch and cullet are normally introduced cold to the furnace. By using the residual heat from the heating furnace – applicable only for the fossil-fuel fired furnaces – significant energy savings can be achieved. In addition to energy savings, this technique can give an increase in furnace capacity of 10 – 15 % without compromising the furnace life. Investment in equipment and infrastructure downstream of the furnace will be required in order to be able to utilise any increase in pull capacity. Costs, in particular related to increased machine capacity, could be significant. Direct, indirect, and hybrid systems are the three types of preheaters used. Regenerative Regenerative furnaces have two chambers, each containing refractory material, called the furnaces checker. While in one chamber the combustion gases pass through the checker and enter the furnace in the other chamber the checker is heated, or regenerated, with the outgoing hot exhaust gas. The furnace operates in two cycles, where about every 20 minutes, the flow is reversed so that the new combustion air can be heated by the checker. Typical air preheat temperatures (depending on the number of ports) are normally in the range of 1200 – 1350 ºC, sometimes up to º1400 C . Regenerative furnaces are very common in industry.Side port (cross- fired) and end port configurations are the main types of regenerative furnaces. Side ports are most common and offer good flexibility for adjusting the furnace temperature profile. End-port furnaces, on the other hand, are more energy efficient partly due to reduced heat losse through the ports and partly due to increased residence time of the combustion gases.Multi-pass regenerators, the application of which will only be possible with the construction of a new furnace with the addition of more refractory bricks, recover the energy in the flue gases more efficiently, and can reduce the energy intensity of the furnace . 155 Low carbon finance study (Phase 1 and 2) The World Bank Forhearths process The fact that physical properties of the glass as a function of temperature makes forehearth control control difficult. Forehearth control is particularly important in the container glass industry where control of not only the temperature but also constant gob weight is critical. Proper control reduces the number of rejects, which in turn increases productivity and saves energy. Options include continuous gob monitoring systems, infrared analysis systems and advanced adaptive process control Computerised Computuerized process control systems are applied in diverse range of industries in order to process control improving productivity, product quality, and efficiency of a production line which also help reduce energy consumption directly (e.g. by reducing residence time) or indirectly (by reducing defects). While process control for energy efficiency of a glass melting tank is highly important, it is also difficult as the necessary sensors need to be resistant to the aggressive environments and high temperatures in the melting tank .The use of modern, computerized process control systems in the glass industry is relatively low but is increasing with various producers placing new systems in the market. The energy saving potential of these systems, however, is not very clearly defined. Adjustable speed Adjustable speed drives (ASDs) offer an efficient and effective demand response strategy, as drives on combustion compared to other approaches. For situations where furnace air demand show variations over air fans and time while cooling air and stack blowers run continuously, the the use of Adjustable Speed Drives compressor motors (ASDs) for the fans may offer an opportunity to save electricity. For furnaces showing high variations in the heat demand (e.g. in small-scale, intermittently used furnaces) may also help reduce fuel consumption by reducing excess air amounts. Production pathway shift/ Technology substitution Increased Cullet Use The use of cullet in a glass furnace can significantly reduce the energy consumption because cullet has a lower melting energy requirement than the constituent raw materials – as the endothermic chemical reactions associated with glass formation have been completed – and its mass is approximately 20 % lower than the equivalent batch materials . However, some of the energy savings can be offset by the energy requirements in crushing, cleaning, sorting, and transportation of the cullet. In addition to energy savings, cullet use reduces the amount of raw materials used, decreases energy use in producing the raw materials, and increases the life of the furnace by up to 30% due to decreased melting temperatures and a less corrosive batch. Cullet is also easier to preheat than raw materials, and its use can increase the output of the furnace. Cullet use is generally applicable to all types of furnaces, i.e. fossil fuel-fired, oxy-fuel- fired and electrically heated furnaces. Most sectors of the glass industry routinely recycle all internal cullet, with the exception of continuous filament glass fibre production. Selective batching Selective batching is a technique that can be used to decrease the chemical reaction of alkali and alkaline-earth carbonates and thereby eliminating the formation of low viscosity eutectic liquids at the early stages of melting – which lead to increased reaction and melting times – and promoting reactions between the fluxes and quartz earlier. This can reduce melting times and optimize energy consumption. Developments with this technology have been focusing on spray drying to pre-mix the different raw materials. To spray dry the material, the material needs to be ground very finely, which is already done for the production of glass fibres. Therefore, early applications are focusing on glass fiber production. The technology is undergoing further testing at a larger scale, and not yet commercially available. Oscilating Oscillating combustion is a new technology, which forces the oscillation of the burner fuel to Combustion for Glass create successive, fuel-rich and fuel-lean zones within the flame. This increases heat transfer by Production enhancing flame luminosity and turbulence. It also reduces NOx emissions by avoiding stochiometric combustion conditions that create maximum flame temperatures that are ideal for NOx creation. Oscillating combustion can be retrofitted onto existing burners by installing an oscillating valve on the fuel line to each burner and an electronic controller that handles several valves simultaneously. It can be retrofitted on systems fired with ambient air, preheated air, enriched air and oxygen. Several field demonstrations have been completed to date, including four stack annealing and fiberglass melting furnaces. Electricity generation Waste heat boilers The temperature of the flue gases leaving the regenerator is usually between 300 and 600°C, and can be used to recover steam. Capturing the waste heat can be done before the flue gas cleaning (with subsequent cleaning) or after gas cleanup. The amount of heat that can be recovered is dictated by the outlet temperatures, which is limited to around 200°C in order to avoid condensation on boiler tubes (IPTS/EC, 2013, p. 316). Produced steam can be used to 156 Low carbon finance study (Phase 1 and 2) The World Bank generate power (using steam turbines), drive blowers or compressors, and/or preheat and dry cullet. Table 64: Description of options for Iron and Steel Measures Description Energy efficiency BOF waste heat and Energy recovery from the Basic Oxygen Furnace (BOF) gas and waste heat. In Basic Oxygen gas recovery Furnace (BOF) steelmaking, a charge of molten iron and scrap steel along with some other additives (manganese and fluxes) is heated and refined to produce crude steel. An oxygen lance is lowered into the convertor and pure oxygen is blown into the furnace. The carbon in the steel reacts to CO and CO2 and leaves the convertor as gas. Two systems can be used to recover energy from the converter gas. In the first one, BOF gas is combusted in the converter gas duct, and subsequently the sensible heat is recovered in a waste heat boiler. In the second system, BOF gas is cleaned, cooled and stored in a gas holder for further use. Top gas pressure Energy recovery from blast furnace top gas pressure (TRT) recovery turbine Top gas-recycling blast Top gas-recycling blast furnace (TGR-BF) - energy/carbon reductants recovery/recycling. CO furnace (with CCS) and H2 content of the top gas has a potential to act as reducing gas elements, and therefore their re-circulation to the furnace is considered as an effective alternative to improve the blast furnace performance, enhance the utilization of carbon and hydrogen, and reduce the emission of carbon oxides. In Top Gas Recycling Blast Furnace (TGRBF), oxygen is blown into the blast furnace instead of hot air to eliminate N2 in off-gas. Part of the off-gas containing CO and H2 is utilized again as the reducing agent in BF. CO2 from the off-gas is captured and subsequently stored. Various recycling processes have been suggested, evaluated or practically applied for different objectives. These processes are distinguished by: 1) with or without CO2 removal, 2) with or without preheating, and 3) the position of injection. Energy monitoring and As above management system Improved process As above control Improved electric motor For example, compressors, pumps and fans system controls and variable speed drives Energy efficient boiler As above systems and kilns Energy efficient utility For example, lighting, refrigeration, compressed air systems Improved heat As above exchanger efficiencies Production pathway shift Electric arc furnace Increasing production of steel from scrap in Electric Arc Furnaces (EAF) (EAF) and secondary production route Electricity generation State-of-the-art power Power plants can play an important role in saving energy and mitigation in integrated plant steelworks by consuming excess process gases, reducing flaring and provide the necessary steam and power to all the key processes. These fuels (BF gas, COG and BOF gas) are used in other areas of the integrated works and, in order to supplement these fuels, most integrated steelworks also utilise purchased fuels (oil and natural gas, for example) in the power plant. DRI shaft/kiln off gas and heat can also be utilised for power generation. On-site clean power Implement onsite clean energy generation (e.g. PV, hydro, wind etc.) generation Carbon capture and storage (CCS) CCS - Blast Furnace CCS is a key element for the decarbonisation of the Iron & Steel industry. In an integrated steel (post-combustion) plant there are basically two issues due to the fact that they concentrate CO2 emissions for the application of this technology: namely the blast furnaces and the power plants that are usually linked to the Iron & Steel plant. There are the main techniques for the separation of CO2. Post-combustion capture is based on the separation of CO2 after combustion. This means that the challenge is to separate CO2 from the exhaust gases by means of an absorption liquid which captures the CO2; this CO2 can then be transported to its place of 157 Low carbon finance study (Phase 1 and 2) The World Bank Measures Description storage. Pre-combustion capture is based on the separation of CO2 before combustion. Typically, the fuel is gasified, which gives syn-gas. This syn-gas can be converted to H2 and CO2 using a water gas shift reaction. CO2 is then removed from this stream by means of an absorption liquid, and subsequently transported and stored. The hydrogen can be combusted for energy production. Oxy-fuel combustion is based on the use of pure oxygen instead of air, ensuring that the flue gases will contain predominantly CO2, which can be directly transported and stored. State-of-the-art power CCS is a key element for the decarbonisation of the Iron & Steel industry. In an integrated steel plant (with CCS) plant there are basically two issues due to the fact that they concentrate CO2 emissions for the application of this technology: namely the blast furnaces and the power plants that are usually linked to the Iron & Steel plant. There are the main techniques for the separation of CO2. Post-combustion capture is based on the separation of CO2 after combustion. This means that the challenge is to separate CO2 from the exhaust gases by means of an absorption liquid which captures the CO2; this CO2 can then be transported to its place of storage. Pre-combustion capture is based on the separation of CO2 before combustion. Typically, the fuel is gasified, which gives syn-gas. This syn-gas can be converted to H2 and CO2 using a water gas shift reaction. CO2 is then removed from this stream by means of an absorption liquid, and subsequently transported and stored. The hydrogen can be combusted for energy production. Oxy-fuel combustion is based on the use of pure oxygen instead of air, ensuring that the flue gases will contain predominantly CO2, which can be directly transported and stored. Technology substitution DRI - Midrex ULCORED, Midrex and HYL are three processes that produce DRI from pellets by gas-based direct reduction in a shaft furnace. The three processes are very similar, although they differ in terms of the details of how the gas is produced and heat is recovered. The gas used for reduction can be either natural gas or coke oven gas. Alternatively, the gas can be made by gasifying coal or biomass. The decision between using gas o resorting to gasification will depend on local availability and the price of the resources. When these technologies are based on a coal gasifier they contain a CO2 removal step. This means that these options are easy to combine with CCS, subject to minimal additional investment. A purification step might still be necessary, according to the necessary specifications for storage. ULCORED is a process that was developed within the ULCOS consortium, and is not yet in operation. Midrex and HYL are both readily available and operated at several locations. DRI - HYL See above DRI - ULCORED See above Hlsarna Based on cyclone converter furnace. Hlsarna uses bath-smelting technology to produced steel in a more energy efficient and less carbon intensive process. The Hlsarna process uses a number of processes proven at a smaller scale such as partial pyrolysis and ore melting cyclone and allows for the partial replace of coal by biomass, natural gas or hydrogen. Electrolysis as an Electrons, provided by electricity, are used as reducing agents. Iron ore is placed in a solution alternative to traditional and charged with an electric current. This positively charges the iron ions, which are then furnaces transported to the negatively charged cathode where they are reduced to elemental iron. There are currently two electrolysis routes being developed: an electrotwinning process and molten oxide electrolysis. Fuel switch Hydrogen reduction Hydrogen reduction involves reducing iron ores with H2 to yield water vapour instead of CO2 emissions, using a carbon-based reductant. The use waste plastic in Using waste plastics in the place of coal decreases the blast furnace coke and energy blast furnaces consumptions and as a result can lower CO2 emissions by 30% when compared to coke and coal. A further advantage of waste plastic is their lower sulphur and alkali content. Use of natural gas in Injecting natural gas reduces the coke production. Natural gas also enriches the furnace with blast furnaces hydrogen, a reducing agent. Hydrogroen reduction does not result in CO2 as a product, thus reducing CO2 emissions. 158 Low carbon finance study (Phase 1 and 2) The World Bank Table 65: Description of options for Liquid Fuels Mitigation measures Description Energy efficiency Improve steam generating boiler efficiency Approximately 30% to 40% of onsite energy use at domestic refineries is used in the form of steam generated by boilers, cogeneration, or waste heat recovery from process units. Implement measures including systems approach to Steam Generation, boiler feed water pre-treatment, Improved Process Control, Improving the insulation on the distribution pipes, maintenance program., recover steam from blowdown, reduce standby losses, improve and maintain steam traps and install Steam Condensate Return Lines. Improve process heater efficiency Improve process heater efficiency by implementing draft control (e.g. maintain excess air at 1% rather than the previous 3-4%) and combustion air pre-heating (e.g. Every 20°C drop in exit flue gas temperature increases the thermal efficiency of the furnace by 1%. The resulting fuel savings can range from 8-18%). Waste heat recovery and utilisation Recovery and utilization of waste heat in refinery using of waste heat boilers to reduce the use of fuel for the production of steam. Flue gases throughout the refinery may have sufficient heat content to make it economical to recover the heat. Typically, this is accomplished using an economizer to preheat the boiler feed water. The most likely candidate for energy recovery at a refinery is the FCCU, although recovery may also be obtained from the hydrocracker and any other process that operates at elevated pressure or temperature. Waste heat boiler and expander applied to flue Heat recovery from the regenerator flue gas is conducted in a waste gas from the FCC regenerator/Improve energy heat boiler or in a CO boiler. Heat recovery from the reactor vapour is efficiency of catalytic cracking conducted in the main fractionator by heat integration with the unsaturated gas plant as well as generation of steam with the residual heat from product rundown streams and pump around streams. The steam produced in the CO boiler normally balances the steam consumed. Installing an expander in the flue gas stream from the regenerator can further increase the energy efficiency. Improvement of the environmental performance catalytic cracking by using specially designed FCCU regenerators for high efficiency, complete combustion of catalyst coke deposits, without the need for a post-combustion device reducing auxiliary fuel combustion associated with a CO boiler. Energy management and monitoring system Benchmark GHG performance and implement energy management systems to improve energy efficiency Improved process control Improved process control Improved heat exchanger efficiencies Improved heat exchanger efficiencies Improved electric motor system controls and Improved electric motor system controls and variable speed drives VSDs (e.g. compressors, pumps and fans) Energy efficient utility systems Energy-efficient utility systems (e.g. lighting, refrigeration, compressed air) Fuel switch Use refinery fuel gas (RFG) instead of HFO Maximisation of the use of refinery fuel gas (RFG) with low H2S content (20 - 150 mg/Nm3 by amine treating) to save energy and reduce emissions. Identify and using, if possible, opportunities for synergy outside the refinery fence (e.g. district/ industrial heating, power generation). Reduce use of heavy fuel oil. GHG Emissions Abatement Minimise flaring and utilise flare gas as fuel Minimise flaring. Use flaring of RFG only during start up/ shutdown/ upset/ emergency conditions to reduce emissions. Install flare gas 159 Low carbon finance study (Phase 1 and 2) The World Bank recovery compressor system to recover flare gas to the fuel gas system. Electricity generation Efficient energy production (CCGT and CHP) Efficient energy production using combined cycle power generation and co-generation plants (CCGT/CHP). Use internally generated fuels or natural gas for power (electricity) production using gas turbine and generate steam from waste heat of combustion exhaust to achieve greater energy efficiencies. Can generate all power needs and export excess power to the grid reducing grid imports. CCS CCS - Existing refineries Carbon Capture and Storage (CCS) - Removal of CO2 from Flue Gas Streams, capture and disposal of CO2. Three techniques are available: oxy-combustion, Post-Combustion Solvent Capture and Stripping, and Post-Combustion Membrane. CCS - New Refineries Carbon Capture and Storage (CCS) - Removal of CO2 from Flue Gas Streams, capture and disposal of CO2 installed on new refineries. Table 66: Description of options for Mining: Non-Coal Mitigation measures Description Energy efficiency Improve energy efficiency of mine haul and The mining industry has identified many energy savings in diesel using transport operations activities. These include: payload management managing intersections, gradients and distances travelled through better mine planning idle time management Process, demand & energy management Monitoring - Real time monitoring and display of demand loads and system energy consumption at the BU's control centres. Management System - Energy Database access to end users that shows process level details on daily basis for management. Power Factor Correction - Reduce the reactive load to increase plant PF levels Energy efficient lighting Replace inefficient lighting with efficient FLs and LEDs Install energy efficient electric motor systems Replace old, inefficient electric motors (e.g. circuits, grinding, transport, compressors, pumps and fans etc.) with energy efficient motors. Optimise existing electric motor systems Optimise existing electric motor system control and install variable (controls and VSDs) speed drives on part load systems to match load with demand (e.g. circuits, grinding, transport, compressors, pumps and fans etc.) Fuel switch Use of 1st generation biodiesel (B5) for Use of 5% biodiesel (B5) for transport and handling equipment/open transport and handling equipment pit mobile machinery Use of 2nd generation biodiesel (B50) for Use of 50% biodiesel (B50) for transport and handling equipment/ open transport and handling equipment pit mobile machinery Use of 2nd generation biodiesel (B100) for Use of 100% biodiesel (B100) for transport and handling transport and handling equipment equipment/open pit mobile machinery Electricity generation Onsite clean power generation Implement onsite clean energy generation (e.g. PV, hydro, wind etc.) Cogeneration Cogeneration can occur through a number of processes (e.g. Conventional steam cycle process and Organic Rankine Cycle (ORC) process) 160 Low carbon finance study (Phase 1 and 2) The World Bank Table 67: Description of options for Paper and Pulp Mitigation measures Description Energy efficiency Energy efficient boiler systems (e.g. preheating of air and fuel charged to boilers, reduced heat lossess, improved and kilns and Improved heat heat exchanger efficiencies, Improved process integration etc) systems Energy recovery system Utilise waste biomass by-products from debarking/wood chipping and screening as fuel and burn dissolved organic material in solid fuel boiler to recover energy as process steam and/or electrical power. Energy efficient Thermo New energy efficient Thermo-Mechanical Pulping (TMP) processes using high Mechanical Pulping (TMP) efficiency multi-stage refining Energy efficient electric (e.g. compressors, pumps and fans) motors, improved controls and variable speed drives Energy monitoring and management system Energy-efficient utility systems (e.g. lighting, refrigeration, compressed air) Improved process control Fuel switch Convert fuel from coal to Avoid emissions from fossil fuels by utilising biomass wastes as fuel in pulp and paper biomass/residual wood waste production. Electricity generation Application of Co-generation "Paper industry is a high energy consuming industry. Increased speed of paper of Heat and Power (CHP) machines, more sophisticated recovered paper processing systems, and technological development in general have resulted in higher consumption of electricity in paper mills whereas the specific use of steam remained virtually unchanged. The energy losses from power generation and from heat production can be reduced by combined generation of both, heat and power (CHP, cogeneration). Cogeneration plants raise the conversion efficiency of fuel use from around one-third in conventional power stations to around 80% (or more). " Gasification of Black Liquor Gasification is a suitable promising technique for pulp mills for the generation of a surplus of electrical energy. Production of a combustible gas from various fuels (coal, wood residues, black liquor) is possible through different gasification techniques. The principle of the gasification of black liquor is to pyrolysis concentrated black liquor into an inorganic phase and a gas phase through reactions with oxygen (air) at high temperatures. Table 68: Description of options for PGM’s and Gold Mitigation measures Description Energy efficiency Improve energy efficiency of The mining industry has identified many energy savings in diesel using activities. These mine haul and transport include: payload management managing intersections, gradients and distances travelled operations through better mine planning idle time management Monitoring - Real time monitoring and display of demand loads and energy consumption Process, demand & energy at the BU's control centres. Management System - Energy Database access to end management system users that shows process level details on daily basis for management. Power Factor Correction - Reduce the reactive load to increase plant PF levels Energy efficient lighting Replace inefficient lighting with efficient FLs and LEDs Install energy efficient electric Replace old, inefficient electric motors (e.g. circuits, grinding, transport, compressors, motor systems pumps and fans etc.) with energy efficient motors. 161 Low carbon finance study (Phase 1 and 2) The World Bank Mitigation measures Description Optimise existing electric Optimise existing electric motor system control and install variable speed drives on part motor systems (controls and load systems to match load with demand (e.g. circuits, grinding, transport, compressors, VSDs) pumps and fans etc.) Fuel switch Use of 1st generation Use of 5% biodiesel (B5) for transport and handling equipment/open pit mobile biodiesel (B5) for transport machinery and handling equipment Use of 2nd generation Use of 50% biodiesel (B50) for transport and handling equipment/ open pit mobile biodiesel (B50) for transport machinery and handling equipment Use of 2nd generation Use of 100% biodiesel (B100) for transport and handling equipment/open pit mobile biodiesel (B100) for transport machinery and handling equipment Electricity generation Onsite clean power Implement onsite clean energy generation (e.g. PV, hydro, wind etc.) generation Cogeneration can occur through a number of processes (e.g. Conventional steam cycle Cogeneration process and Organic Rankine Cycle (ORC) process) 162 Low carbon finance study (Phase 1 and 2) The World Bank APPENDIX 4 SUMMARY LITERATURE REVIEW Reference Barriers to low carbon investment / funding Recommendations Regulatory barriers to renewable energy projects linked to electricity regulation and unclear (or lacking) NERSA regulations: *Rules regarding generation licenses above 1MW unclear *Grid access is complicated *Lack of net metering in many municipalities Cloete et *Ability to wheel power is limited (and process unclear) General al., 2016 *Many distributors lack time-of-use tariffs *Lack of long-term feed-in tariffs *Missing or unattractive short-term feed-in tariffs *Embedded generation rules not finalised *Lack of ESCOs and service providers with long track record and strong balance sheets. Banks are risk aversive and typically only lend for 5-7 years while Insurance products could reduce bankability requirements by Cloete et General the breakeven point (payback period) for renewable energy is removing some counterpart risk and concessionary finance could al., 2016 typically around 15-17 years reduce payback periods. The processes and documentation required to access the funding Helping project developers understand how to design projects to Cloete et can be quite onerous. This is even more some when financial General maximise sustainable development outcomes and thereby make it al., 2016 institutions disburse concessional funding from third parties since easier to unlock ‘soft’ finance could be useful. two sets of requirements then need to be met. Credibility of the off-taker is an issue given long term nature of Cloete et LED projects (even for seemingly well capitalised private sector * Wheeling power to more than one off-taker General al., 2016 entities). Long-term nature of projects exposes funders to general * Use of risk mitigation or sharing measures like credit guarantees market risk in the relevant sectors. Funding for small projects presents additional challenges due to a * Soft funding in the form of grants and/or low-interest loans Cloete et lack of economies of scale. Small-scale projects suffer from long * Project development and preparation support (e.g. assistance General al., 2016 lead times, and high project preparation and environmental with the feasibility and pre-bankable feasibility costs) authorisation costs relative to returns. * Simplified regulatory regimes and environmental authorisations Cloete et High cost of implementing Public-Private-Partnerships (PPPs) General al., 2016 means that projects below R1bn is unlikely Cloete et Lack of information sharing between lenders about opportunities General al., 2016 and lack of willingness of co-fund projects There is a lack of information relating to technologies where the Collaboration between number of local initiatives or institutions Cloete et General local application is less mature like biomass, biogas and co- gathering market information on new LED applications in South al., 2016 generation that can hamper project development. Africa. Cloete et Cheaper to landfill waste than to implement waste-to-energy General al., 2016 projects 163 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations Power grids in need of repairs, upgrades and maintenance (and Cloete et General many municipalities lack the human and financial resources to do al., 2016 so) Cloete et General Regulatory barriers related to electricity sales (see above) al., 2016 Cost barriers: solar has only recently become cost competitive Cloete et Solar with grid electricity in SA, and many companies can earn higher al., 2016 returns investing in their primary business. Cloete et Solar Payback for ground-mounted PV is 7-8 years. al., 2016 Cloete et Solar Solar panels expensive with high administration costs al., 2016 Cloete et Solar Theft of solar panels al., 2016 Few suppliers and installers of PV systems with long track The market needs a number of big players with strong balance Cloete et records. This makes it difficult to judge the quality of PV systems, Solar sheets and proven track records to provide credibility to both the al., 2016 and acts as a barrier to all but the most informed purchasers of domestic and corporate solar PV markets solar PV systems Many municipalities fear that allowing embedded generation will Cloete et General jeopardise revenues from electricity sales that are used to cross- al., 2016 subsidise a number of other municipal services Large wind farms can generate electricity at around 50c/kWh, but Cloete et Wind smaller wind farms (5MW or less) are less competitive at around al., 2016 R1.10/kWh. Cloete et Lengthy and challenging regulatory process (15-27 different Wind al., 2016 approvals) Cloete et Procuring feedstock of a consistent volume, quality and price is a Biomass al., 2016 significant barrier. Cloete et Biomass High regulatory requirements al., 2016 Cloete et Given the large feedstock requirements, very few biomass off- Biomass al., 2016 takers that funders would have confidence in. Cloete et Biomass Most significant barrier is access to waste streams al., 2016 High regulatory barriers e.g EIA's, MFMA constraints and Cloete et Waste to government approvals, zoning and land access, air pollution al., 2016 Energy controls Cloete et Waste to Generally administrative and complex processes al., 2016 Energy Cloete et Waste to Price barriers - waste disposal fee too low to incentivise access to al., 2016 Energy waste 164 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations Price of recyclables is too low to stimulate demand and support Cloete et Waste to materials recovery facilities which would make more waste al., 2016 Energy available for waste to energy projects Cloete et Waste to challenge in securing grid access and offtake agreements al., 2016 Energy Cloete et Waste to Lack of awareness of the benefits of biogas technologies al., 2016 Energy Cloete et Waste to Few EPCs have large enough balance sheets to provide banks al., 2016 Energy with performance guarantees for larger projects Cloete et Waste to Lack of dedicated finance for promising new technologies like al., 2016 Energy biogas Some Investors do not consider pyrolysis and gasification to be Cloete et Waste to Support from institutions such as the Technology Innovation sufficiently mature technologies in the South African context to al., 2016 Energy Agency, IDC and DTI. warrant the investment risk Cloete et Waste to Biogas projects not yet financially viable without large amounts of al., 2016 Energy equity Cloete et Hydropower Water stressed country al., 2016 Cloete et Hydropower Wheeling arrangements and securing off-takes are problematic al., 2016 Cloete et Hydropower Regulatory barriers E.g Water Use Licences al., 2016 Cloete et Payback for micro-hydro plants within bulk water infrastructure Hydropower al., 2016 high (14-15 years) Cloete et Co- Difficult to obtain finance given expensive electricity, high upfront al., 2016 generation investment, and long payback periods Little early stage funding available for co-gen projects. This is Cloete et Co- longest part of project cycle and costs are typically carried by al., 2016 generation project developers. Off-taker risk is significant issues given high upfront capital Cloete et Co- requirements, long financing period (around 12 years) and al., 2016 generation significant market risk to heat or gas supply. Electricity generated is relatively expensive, and appears less Cloete et Co- competitive than other technologies (unless co-gen is very well al., 2016 generation integrated with existing processes) Many projects linked to the mining and beneficiation sector, which Cloete et Co- is subject to commodity cycles which bring market risk (co-gen al., 2016 generation only operates while plant operates as it is source of heat and gas) Complications around wheeling mean that co-gen projects are Cloete et Co- typically captive projects unless they were designed to feed into al., 2016 generation the Eskom grid - which concentrates risk. 165 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations Co-gen projects are very capital intensive and thus less well Cloete et Co- suited for incentives like 12L that reward energy savings once the al., 2016 generation investment has been made Regulatory barriers to projects such as the framework for feeding The issue of regulatory certainty and clear long-term feed-in tariffs Nicholls et General into the grid, net metering, wheeling and lack of time-of-use are critical to enabling large-scale uptake of smart grids and al. 2015 tariffs. distributed generation * A unified understanding of the problem and price certainty allowing for alignment of policy and intention whereby the full suite Nicholls et General Difficulty in measuring revenue and reduction in costs. of financial instruments can be applied, e.g REIPPP Programme. al. 2015 * Collective intent and/or provide a mechanism to generate cash flow or price certainty within the project policy framework There is a threshold for some types of projects where policy Nicholls et Policy must be used as an overarching protection mechanism General measures cannot create a price proportional to the value of the al. 2015 providing specific rules. underlying asset. Providing price disincentives (higher fuel taxes and large passenger vehicle taxes) and incentives (company or government Nicholls et Shifts to LPG or electric vehicles are hindered in the context of Transport department mobility allowances rather than car allowances, Spatial al. 2015 limited supply of gas and energy solutions like no drive zones and efficiency solutions like common ticketing across transport modes Overcoming issues of bias and perception was a big focus and requires some systemic changes to seemingly unrelated systems. Company and government department’s views on flexitime, dress Nicholls et Prejudices against public transport use, making public transport Transport code and expectations on employees to carry large amounts of al. 2015 more accessible, more hygienic, more secure and easier to use documents and or high value items like laptops would need to be reviewed. Clearly awareness and communications campaigns would be a big part of any solution in this space. Nicholls et Legislative challenges and uncertainty with generating and More multi-stakeholder sessions would be helpful and should General al. 2015 wheeling E.g mine dumps include DMR and DOE Using policy to provide price certainty, driving certainty and Regulatory uncertainty with smart grids. E.g long term feed-in scalability through clear regulation, policy and feed-in tariffs; and Nicholls et General tariffs were critical to enabling large scale uptake of smart grids driving commercialisation through evolving business models in the al. 2015 and distributed generation. s. electricity sector. Finalise NERSA Consultation Paper: Small-Scale Embedded Generation: Regulatory Rules. In addition to this, it was recognised that the need to ensure that Nicholls et the grid infrastructure is capable of bi-directional, volatile flows of General al. 2015 electricity, which is essential for driving a successful roll-out of smart grid National government needs to subsidise the difference in price, Nicholls et Price of electricity from renewable energy sources is still higher General which would be much smaller than the subsidy provided to the al. 2015 than Eskom’s prices for municipalities. REIPPP 166 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations In the case of South Africa our planning framework (the NDPs Stakeholders did however report challenges relating to policy Nicholls et implementation through the Medium Term Strategic Framework General coherence and structural barriers within the financial service al. 2015 and supported by the 9-point plan) is a significant aid to project sector. development and economic transition In South Africa, the primary concern is overcoming structural This type of problem is best solved through clever policy Nicholls et General barriers in the economy in general and specifically issues in the developed in tandem with the financial services sector and other al. 2015 financial services sector. stakeholders. Important that government and project developers increase their knowledge on how finance works in relation to development and focus on the role of policy in driving investment and provides Projects required to grow using only grant and concessional debt Nicholls et guidance on how international finance could be deployed in General which inhibits the scale and risk tolerance of project and project al. 2015 support of green economy or climate transition objectives. Using classes. international finance or capital identified within the South African fiscus in support of plugging structural gaps in the South African financial services sector should be a key policy objective. Nicholls et General Low credit ratings and investor confidence al. 2015 CICERO, General Funding is often a barrier preventing climate measures. Grants is a financial instrument available to remove this barrier 2016 CICERO, Political risk can be a deterrent to investments in particular General Guarantees are instruments available to mitigate this barrier. 2016 countries CICERO, Renewable energy technologies are capital-intensive General 2016 technologies CICERO, General Low power grid capacity Interest rate subsidy and technical support 2016 The Green House, General Availability to feed electricity to the grid 2016 The Green House, General Presence of common electricity tarrifs 2016 The Green Exchange rates and instability of the South African Rand can alter House, General project viability 2016 The Green House, General Low labour productivity increase education and capacity 2016 The Green Length of regulatory processes e.g land lease rights, obtaining House, General generating licenses or exemptions 2016 167 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations They indicated that projects should rather be supported in the The Green Labelling projects as LED projects, and overanalysing their same manner as any other technology-based projects. Key to this House, General possible contribution, operation, performance and support needs component of this support would be facilitation of access to cash 2016 delay projects unnecessarily or even prevent implementation flow (rather than guarantees, capacity building etc The Green Analyses and needs assessments related to supporting LED House, General projects are commissioned repeatedly 2016 The Green House, General Access to cash flow to fund projects. 2016 The Green House, General LED projects require longer payback periods and are higher risk. 2016 Buy in for co-gen plants is only possible if the project offers The Green savings over the long term in order to justify the up-front costs House, General and the risk. This is seldom possible over the short term, with 2016 projects typically requiring at least a 10- to 15-year commitment In the case of distributed generation or micro-grids for instance The Green the minimum is 10 years, requiring some sense that the politics House, General and macro-economics of the country will be stable over that time. 2016 Given the risks, projects often do no proceed without government (or development banks) underwriting the projects The Green Availability of a set of guidelines and forms, which would be Administrative burden associated with applications for permits, House, General accepted across institutions, would help to streamline the process licenses and funding. Expensive and time consuming 2016 significantly The Green Municipalities need capacity built in relation to the ability to House, General Lack of technical capacity in the municipalities stipulate and assess the technical requirements of tenders 2016 The Green municipalities frequently do not have the technical knowhow or House, General capacity to assess the viability of unsolicited approaches from 2016 project developers Lack of technical knowhow affects the type of procurement The Green undertaken - without being informed by technical expertise the House, General terms of tenders can often be technically unfeasible, acting as a 2016 disincentive for project developers The Green Project developers also identified slow turnaround times in House, General relation to decisions on tenders as problematic and a disincentive 2016 to work with municipalities 168 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations Project developers identified a lack of uncertainty about incentives and penalties, both in terms of whether they are likely to be implemented (for example, the carbon tax) and whether a The Green project will be liable or eligible until after the application process House, General has been completed (such as for a reduction in electricity tariffs), 2016 as being a limitation on building the business case for projects. Such incentives and penalties can make the difference of a make or break on both achieving funding and on the viability of the project itself The Green One of the key requirements for financiers to fund a project is that House, General it be bankable, with returns commensurate with the project risk. 2016 This points to the potential opportunity for seeking funding The Green Projects that are too small battle to get funding as the legal and mechanisms for baskets of similar projects, and streamlining of House, General regulatory cost barriers are too high regulatory and application procedures – so as to help overcome 2016 these hurdles Where projects are linked to or are affected by commodity cycles The Green (such as co-generation being linked to primary minerals or House, General biofuels competing against low fossil fuel prices), this adds an 2016 additional level of uncertainty to the project, thus resulting in additional risk to investors Smaller EPC companies often do not have the balance sheets to be able to provide guarantees for project finance. As such, large The Green EPC contractors, with balance sheets of upwards of House, General approximately R2 billion are often approached instead. Such 2016 companies, however, are more expensive than smaller companies which in turn renders the project potentially uncompetitive The Green House, Solar High costs of batteries and storage 2016 Continued reluctance on the part of municipalities to support solar The Green PV due to misperceptions about safety & misconceptions about House, Solar the technology’s performance and requirements (e.g. not all PV 2016 needs batteries) The Green High costs of meters and costs associated with required House, Solar installation and sign off add significant costs, particularly for small 2016 scale (household) installations The Green Some municipal utilities (such as City Power) are viewed to House, Solar actively discourage embedded generation 2016 169 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations The Green Lack of knowledge and experience in relation to net metering - House, Solar Municipalities are ill-equipped to manage the complications that 2016 would arise The Green Lack of strong supportive signal from government creates House, Solar uncertainty about future of sector and hampers future growth and 2016 planning High costs of panels - even locally produced solar panels are The Green priced in dollars due to the contribution of imported inputs to their House, Solar manufacture, and the fact that the panels can be sold on 2016 overseas markets The Green The multitude of electricity tariffs across the country raises House, Solar administrative costs for developers - which are then passed on 2016 the clients The Green The multitude of electricity tariffs also means that the business House, Solar case must be assessed individually for each installation 2016 Going to market to finance PV systems is challenging as there is The Green no underlying asset that can resold to recoup loan in the event of House, Solar losses, there is not considered to be a viable second-hand 2016 market, which is in part due to improvements in the technology over time The Green House, Solar Theft is a big issue in both rural and urban areas 2016 The Green House, Biofuels Low international oil price renders biofuel prohibitively expensive 2016 The Green House, Biofuels SA’s drought renders the production of fuel from food sources 2016 The Green Lack of progress on Biofuels Regulatory Framework by House, Biofuels government means the industry is effectively in limbo 2016 The 2005 Biofuels Industrial Strategy requires ethanol to be The Green manufactured from new lands and to create new jobs (even House, Biofuels though bio-ethanol is currently produced and would only need to 2016 be rerouted) The Green DOE needs to allow for testing of small amounts of ethanol but so House, Biofuels far Ethanol blending regulations have only recently been gazetted 2016 170 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations The Green SARS will only go ahead (and classify ethanol) if the Framework House, Biofuels regulations are published, or if NT waives the levy 2016 The Green As ethanol not yet classified as a fuel & no fuel tax is payable on House, Biofuels that portion, the government only gets taxes on the taxable part of 2016 a blended fuels - disincentive The Green Insufficient awareness of the opportunity which leads to House, RE-CNG insufficient demand to establish extensive networks of 2016 infrastructure for gas distribution The Green Slow government decision-making leads to long lead times for House, RE-CNG CNG projects (in both stationary and mobile applications) thus 2016 adding to risk & cost There is a need to consider supply and demand (including roll-out The Green of vehicles) in an integrated fashion. It is not possible to consider House, RE-CNG only one component of the system in isolation, which is what is 2016 happening at the municipal level at present The Green The issue of taxation of CNG as a fuel still hasn’t been sorted by House, RE-CNG Treasury 2016 The Green Waste to House, Incineration needs large waste volumes to make it feasible Energy 2016 The Green Waste to Permitting and air pollution controls are a large (sometimes House, Energy prohibitive) cost 2016 The Green Investors do not consider pyrolysis and gasification to be Waste to House, sufficiently mature technologies in the SA context to risk the Energy 2016 investment Municipalities have a cradle-to-grave responsibility for managing The Green Waste to municipal solid waste so are reluctant to outsource processing if House, Energy there’s a risk the technology might not work or the provider could 2016 go bankrupt The Green Waste to Very low landfill gate (tipping) fees provide little incentive for House, Energy pursuing alternative waste management options 2016 The Green Waste to House, Lack of technical or legal capacity Energy 2016 The Green Co- Electricity generated is expensive, and cannot compete with other House, generation technologies 2016 171 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations The Green The large up-front costs make project development on co-gen Co- House, plants untenable if the developer cannot convince the host to generation 2016 share in the cost of the preparatory phases Opportunities are often linked to utilisation of waste heat on smelters, and so when a smelter shuts down for any reason the The Green Co- co-generation plant ceases to generate. This risk to project House, generation developers may be mitigated through entering take-or-pay 2016 contracts, such as that which is in place at Anglo Platinum/Eternity Power. The Green Co- The biggest technical challenge is cleaning the gas prior to House, generation generation, although this is one that can be overcome 2016 Most viable potential projects are related to the mining industry. The Green This necessitates working with DMR which potentially Co- House, problematic. Also challenging is obtaining the S79 exemption to generation 2016 deviate from mining safety requirements (which are onerous and not generally applicable to safety on a co-gen plant) The Green Co- House, Getting finance is difficult generation 2017 The Green Co- House, Commodity fluctuations E.g ferrochrome industry generation 2018 Strengthened focus on building institutional capacity to conceptualise climate compatible development projects and manage climate finance well. It will also require investments in Nakhooda good governance of climate finance. Good governance in turn General Transaction costs of small-scale projects et al 2016 requires strengthening the capacity of civil society organizations across the region to engage constructively in the design and implementation of programs that receive funding, and to seek accountability for effective use of climate finance. Nakhooda General Poor investment climate et al 2016 Nakhooda Weak capacity of government institutions to manage finance, General et al 2016 political instability and governance problems Gas to DOE, 2015 Low electricity prices Electricity Gas to Extensive and costly monitoring and verification requirements to DOE, 2015 Electricity qualify for carbon credits Gas to DOE, 2015 Length regulatory process e.g EIAs Electricity 172 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations Biogas to DOE, 2015 Length regulatory process e.g CDM Energy DOE, 2015 Wind Wheeling arrangements were new and difficult to secure DOE, 2015 General Length of regulatory process e.g EIA DOE, 2015 General Electricity price was low DOE, 2015 Hydro Lengthy regulatory processes DOE, 2015 Biogas Length of regulatory process e.g EIA, licencing and permits DOE, 2015 Biogas Lengthy alignments between government procedures Switch to Solar Programme: The initiative offered a database of reputable SWH manufacturers and installers, post-installation Prohibitive initial system costs, low levels of awareness about inspections by certified plumbers and, most importantly, financing. DOE, 2015 Solar SWH performance and durability and delays in installation The programme covered the full initial cost of supply and associated with the greater complexity of SWH sizing and location installation, processed any incentive claims on behalf of the homeowner and then allowed the consumer to repay the balance over a six-year period. The future generation projects are determined by a competitive bidding process, which is assessed on an individual project basis. DOE, 2015 Solar Economies of scale are therefore difficult to obtain and to integrate with network plans During the last quarter of 2015, the board of Eskom issued a Green General letter indicating that the utility would halt the issuance of budget Cape, 2016 quote letters Downturn and decreases in commodity prices, which is reportedly DEA, 2016 General encouraging industry and mining to focus on increasing throughput. Market failures, such as energy service companies that do not DEA, 2016 General have the capacity to adopt innovative financing and technology solutions DEA, 2016 General Negative incentive of high borrowing rates DEA, 2016 General Pay back periods too long DEA, 2016 General High costs and lengthy administrative process DEA, 2016 General Availability of investment financing DEA, 2016 General Lack of information Professionalization of services E.g ESCO's DEA, 2016 Enforcement is ensuring that objectives, processes, and General procedures are well defined and consistently followed where measures are obligatory. 173 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations Creation of an effective enabling environment for long term green investment; ii) allocation of public budgets and investments, including through dedicated funds and/or financial intermediaries GGBP, General Investment risks to encourage green growth; and iii) tailored application of financial 2014 instruments to mitigate risks and increase returns on investment to mobilize private green investment. These strategies are most successful where they have the following features: GGBP, Insufficient rates of return for some green technologies and General 2014 practices GGBP, General Competing subsidies and policies 2014 GGBP, General Insufficient capacity, 2014 GGBP, General Information gaps, and regulatory and institutional barriers. 2014 GGBP, Vested interests of those negatively impacted by energy price General 2014 increases E.g investors in emission intensive sectors, GGBP, General Higher costs of green technologies 2014 GGBP, General Technology development risks 2014 GGBP, General Distortionary subsidies 2014 Improving return on investment, including boosting returns and GGBP, General Lack of liquid debt and equity finance limiting costs and mitigating risks faced over the lifetime of the 2014 project. GGBP, General Information gaps and asymmetries 2014 GGBP, General Skills gaps/ limited technical expertise 2014 UNEP, 2015 General Financing costly or unavailable Support could also be directed towards other renewable energy AFRICEGE, projects that require less catalytic funding but can have a large General High investment costs 2014 impact e.g. rural off grid and mini grid energy and the development of biogas and biofuels. Funds are not well distributed along the project value chain, Green Fund could play an important catalytic role to unlock some AFRICEGE, creating the ‘valley of death’ for projects that don’t qualify for the of these barriers, but at the same time invest in high impact General 2014 financial mechanisms such as grants, but have also not matured projects that could help to drive the transition to a green economy enough to access equity funds and create jobs 174 Low carbon finance study (Phase 1 and 2) The World Bank Reference Barriers to low carbon investment / funding Recommendations Green Cape, Solar High financial costs 2016a Green Cape, Solar Lack of policy 2016a Green Cape, Solar Unregulated tariff structures 2016a Green Cape Waste to Lack of economic viability 2016b Energy 175 Low carbon finance study (Phase 1 and 2) The World Bank APPENDIX 5 IDENTIFIED PROVIDERS OF LOW CARBON FINANCE A 5.1 Private sector Table 69 provides a summary of the identified private sector institutions that have (or do) provide finance to low-carbon related activities and projects. Importantly, however, few of these institutions do so through targeted frameworks, with much of this investment part of a more general project (or activity) financing approach not related specifically to low-carbon investment. Table 69: Private Sector Finance Market Institutions Type of institution Institution Names • RMB • PIC • Coronation Asset Managers • Atlantic Asset Management Institutional • Adlevo Capital investors / Asset • Old Mutual/OMIGSA managers • Red Cap Investments • Zimele (Anglo American’s Enterprise Development) • Mergence Capital • Vantage Capital • Investec • ABSA • Deutsche Bank • FNB Banks and credit • Nedbank providers: • Standard Bank • Sasfin • Greenfin • ESKOM/ Integrated Demand Management (IDM) programme • Greater Capital Lereko Metier Sustainable Capital Fund • Old Mutual Infrastructural, Developmental and Environmental Assets Managed Fund (IDEAS) • Futuregrowth Power Debt Fund Bonds, funds and • Regional Bulk Infrastructure Grant other funding pools • Sasfin Eco Finance product • Strategic Climate Fund • African Infrastructure Investment Managers(AIIM) • Nedbank Green Savings Bond • FNB Business ecoEnergy Loan • Sasfin Eco Finance (aimed at SMMEs) • Adlevo Capital • Business Partners • Mzansi Gold • Inspired Evolution (evolution one fund) • Futuregrowth • Inspired Evolution PE/Venture Capital • RisCura companies and • Harbour Energy advisors • Swedfund International AB • Abax Investments • Angel Hub • Angel Investment Network • Bioventures • Brait Capital • Citadel Capital 176 Low carbon finance study (Phase 1 and 2) The World Bank • Hasso Plattner Ventures (Africa) • HBD (Here Be Dragons) • Horizon Equity • Intel Capital • Invenfin (Remgro Ltd) • Kagiso Group • Khula (Standard Bank of South Africa) • New Africa Mining Fund • Phatisa • PSG Alpha • Sanlam Private Equity (SPE) • Spirit Capital • Treacle • Trivest • Umbono • Water Financial • William Frater • Clinton Climate Initiative (CCI), • Omidyar Network, Non Traditional • B&M Gates Foundation, Foundation Donor 7 • Soros, • Heinrich Böll Foundation, • Konrad-Adenauer-Stiftung A 5.2 Public (government) sector incentives and programmes All the incentives and programmes listed in this section apply to industry, but not all apply to heavy industry. Since heavy industry is not a term used often in South Africa, and lessons may be learnt from programmes that don’t directly benefit it, it was decided to include all industrial incentives in this section. A 5.2.1 Incentive and grant funding programmes Black Industrialists Scheme (BIS) Effective as of 1 February 2017, the Black Industrialists Policy aims to leverage capacity to unlock the industrial potential that exists within black-owned and managed businesses that operate within the South African economy through deliberate, targeted and well-defined financial and non-financial interventions as described in the IPAP and other government policies. The policy seeks to accelerate the quantitative and qualitative increase and participation of Black Industrialists in the national economy, selected industrial sectors and value chains, as reflected by their contribution to growth, investment, exports and employment and create multiple and diverse pathways and instruments for Black Industrialists to enter strategic and targeted industrial sectors and value chains. In summary, the broader objective is to promote industrialisation, sustainable economic growth and transformation through the support of black-owned entities in the manufacturing sector. Capital Projects Feasibility Programme (CPFP) 177 Low carbon finance study (Phase 1 and 2) The World Bank CPFP is a cost-sharing grant that contributes to the cost of feasibility studies likely to lead to projects that will increase local exports and stimulate the market for South African capital goods and services. The primary objective of the programme is to facilitate feasibility studies that are likely to lead to high- impact projects which will stimulate value-adding economic activities in South Africa as this will have greater impact on the country’s industrial policy objectives. Other objectives include: • Attracting high levels of domestic and foreign investments; • Strengthening international competitiveness of South African capital goods sector and allied industries; • Creating sustainable jobs in South Africa; • Creating a long-term demand for South African capital goods and services; • Stimulating project development in Africa and in particular the Southern African Development Community (SADC) countries as well as support for the objectives of the New Partnership for Africa’s Development (Nepad); • Stimulating upstream and downstream linkages with SMMEs and BEE companies. The grant is capped at R8 million to a maximum of 50% of the total costs of the feasibility study for projects outside Africa and 55% of the total costs of the feasibility study for projects in Africa. Critical Infrastructure Programme (CIP) CIP aims to leverage investment by supporting infrastructure that is deemed to be critical, thus lowering the cost of doing business. The South African Government is implementing the CIP to stimulate investment growth in line with the National Industrial Policy Framework (NIPF) and Industrial Policy Action Plan (IPAP). The CIP is a cost-sharing incentive that is available to the approved applicant/s or infrastructure project/s upon the completion of verifiable milestones or as may be approved by the Adjudication Committee. Infrastructure is deemed ‘critical’ to the investment if such investment would not take place without the said infrastructure or the said investment would not operate optimally. The CIP offers a grant of: • 10% to 30% of the total qualifying infrastructural development costs, up to a maximum of R50 million, based on the achieved score in the Economic Benefit Criteria; • Agro-processing applicants and state-owned Aerospace and Defence National Strategic Testing Facilities: The CIP will offer a grant of 10% to 50% of the total infrastructural development costs, up to a maximum of R50 million; • Projects that alleviate water and/or electricity dependency on the national grid: The CIP will offer a grant of 10% to 50%, up to a maximum of R50 million; • Distressed municipalities and state-owned industrial parks: The CIP offers a maximum grant of up to 100%, capped at R50 million for infrastructural developmental. Applicants are encouraged to make a contribution according to their affordability. Manufacturing Competitiveness Enhancement Programme (MCEP) 178 Low carbon finance study (Phase 1 and 2) The World Bank The MCEP provides industrial financing and loan facilities comprised of two components: • Pre and post-dispatch Working Capital Facility which offers a working capital facility up to a maximum of R30 million for a period of up to four years, at a preferential fixed interest rate of 6%; • The Industrial Policy Niche Projects Fund includes projects identified by the DTI sector desks and IDC’s Strategic Business Units that focus on new areas with the potential for job creation, diversification of manufacturing output and contribution to exports, that would otherwise not be candidates for commercial or IDC funding, may be eligible for an MCEP grant that may be structured as part of the borrower’s equity contribution. Manufacturing Investment Programme (MIP) The MIP is a reimbursable cash grant for local and foreign-owned manufactures who wish to establish a new production facility; expand an existing production facility; or upgrade an existing facility in the clothing and textiles sector. The objective of the programme is to stimulate investment in manufacturing, increase employment opportunities; and sustain enterprise growth. Benefits of the programme include: • Investment grant of 30% of the investment cost of qualifying assets for new or expansion projects below R5 million; • Investment grant of between 15% to 30% of the investment cost of qualifying assets for new or expansion projects above R5 million; and • Qualifying assets: machinery and equipment, buildings, and commercial vehicles. Support Programme for Industrial Innovation (SPII) The Support Programme for Industrial Innovation (SPII) is designed to promote technology development in South Africa’s industry, through the provision of financial assistance for the development of innovative products and/or processes. SPII is focuses specifically on the development phase, which begins at the conclusion of basic research and ends at the point when a pre-production prototype has been produced. The SPII offers the following two schemes • SPII Product Process Development (PPD) Scheme, which provides financial assistance of up to R2 million to small, very small and micro-enterprises and individuals in the form of a non-repayable grant where a percentage of qualifying costs (based on BEE ownership) are incurred in the pre-competitive development activities associated with a specific project. • SPII Matching Scheme provides financial assistance to all enterprises and individuals in the form of a non-repayable grant of up to R5 million. A percentage of qualifying costs, also based on BEE ownership are incurred in the development activities of a specified development project. Strategic Partnership Programme (SPP) 179 Low carbon finance study (Phase 1 and 2) The World Bank The SPP was developed to provide support programmes/interventions aimed at enhancing the manufacturing and services supply capacity of suppliers with linkages to strategic partner’s supply chains, industries or sectors. The objective of SPP is to encourage large private sector enterprises in partnership with Government to support, nurture and develop SMEs, in particular BEEE policies, within the partner’s supply chain or sector to be manufacturers of goods and suppliers of services in a sustainable manner. The grant approval is capped at a maximum of R15 million (vat inclusive) per financial year over a three (3) year period towards qualifying costs. It is available for infrastructure and business development services necessary to mentor and grow enterprises. A 5.2.2 Tax allowances and exemptions 12B Tax Incentive Section 12B of the Income Tax Act No. 58 of 1962, as amended (the 'Act'), provides for a capital allowance for movable assets used in the production of renewable energy. The tax allows for a deduction on a 50|30|20 basis over three years in respect of any machinery, plant, implement, utensil or article (referred to as a qualifying asset) owned by the taxpayer. The asset has to be brought into use for the purposes of the taxpayer's trade in order to generate electricity from renewable energy sources such as wind power; solar energy, hydropower (gravitational water forces) to produce electricity of not more than 30 megawatts; and biomass comprising organic wastes, landfill gas or plant material. 12 I Tax Incentive The 12I Tax Incentive is designed to support Greenfield investments (i.e. new industrial projects that utilise only new and unused manufacturing assets), as well as Brownfield investments (i.e. expansions or upgrades of existing industrial projects). The incentive offers support for both capital investment and training. The investment allowance consists of: • R900 million in the case of any Greenfield project with preferred status or; • R550 million in the case of any other Greenfield project (qualifying status) or; • R550 million in the case of any Brownfield project with preferred status or; and • R350 million in the case of any other Brownfield project (qualifying status). An additional training allowance of R36 000 per full time employee may be deducted from taxable income; and a maximum total additional training allowance per project, amounting to R20 million, in the case of a qualifying project, and R30 million in the case of a preferred project. 12K Tax Incentive Section 12K of the Income Tax Act, No. 58 of 1962 (the Act) provides for a tax exemption on any amount accrued in respect of the disposal of any certified emission reduction (CER) credit derived in the furtherance of a qualifying clean development mechanism. 180 Low carbon finance study (Phase 1 and 2) The World Bank 12L Tax Incentive The 12L Tax incentive, according to Income Tax Act, 1962 (Act No. 58 of 1962) provides an allowance for businesses to implement energy efficiency savings. The savings allows for tax deduction of 45c/kwh saved on energy consumption and applies to all energy carriers (not just electricity) with the exception of renewable energy sources. For the eligibility to claim the deductions, measurements must be kWh equivalent. The verified and measured energy efficiency saving must be over a period of 12 months known as implementation/assessment period which is compared in contrast with the 12 months of baseline measurement. The institutions that are responsible to the successful implementation of the tax include South African National Energy Development Institute (SANEDI), South African National Accreditation Systems (SANAS), South African Revenue Services (SARS), the DoE and National Treasury. 12U Tax Incentive Section 12U of the Income Tax Act provides allowance for deduction of certain infrastructure expenditure in renewable energy projects. Specifically, this incentives allows for the deduction of expenditure on roads and fences in renewable energy projects. provides an accelerated capital allowance for supporting infrastructure used in producing renewable energy. Full deduction of costs incurred in respect of roads and fences used by IPPs is claimable for renewable energy projects that generate electricity exceeding 5MW. Pre-trade expenditure is deducted when the trade commences, if not already deducted. Table 70 provides a summary of the identified government incentives and programmes. Table 70: Public sector incentives and programme institutes Institution Programme / instrument Still running? Department of Trade and Black Industrialists Scheme Y Industry Capital Projects Feasibility Programme (CPFP) Y Co-operative Incentive Scheme (CIS) Critical Infrastructure Programme (CIP) Y Foreign Investment Grant (FIG) for qualifying foreign investors Manufacturing Competitiveness Enhancement Y Programme (MCEP) Manufacturing Investment Programme (MIP) Y Section 12 I: Tax Allowance Incentive (Section 12I Y of Income Tax Act) for large-scale Greenfield investments and expansion of Brownfield investments in priority sectors identified in the Industrial Policy Action Plan (IPAP) Support Programme for Industrial Innovation (SPII) Y Support under the Special Economic Zones Act Y Technology and Human Resource for Industry Y Programme (THRIP) CDM Carbon Credits from CDM or any other source Y (including voluntary markets) SANEDI Energy Efficiency Tax Incentive (Section 12 L of Y Income Tax Act) Eskom Eskom Demand Side Management (DSM) funding Y [when it was available] South African Revenue Tax incentive 12B: Renewable Energy Y Service (accelerated depreciation) 181 Low carbon finance study (Phase 1 and 2) The World Bank Tax incentive 12K: CDM Y Tax incentive 12U: Expenditure related to renewable energy projects SEDA Seda Technology Programme (STP) Y Department of Science and Tax incentive 11D Tax incentive Scientific and Y Technology Technological R&D Department of Energy REI4P or REI4P small scale Y IPP Co-gen programme Y A 5.3 DFIs and donor related funds A 5.3.1 Development Bank South Africa The DBSA serves to provide support to the South African government by leveraging skills and capabilities to accelerate the implementation of infrastructure programmes in the key priority sectors of education, health and housing, as well as various municipal infrastructure programmes. Their primary role is to assist in the preparation, funding and building phases of the infrastructure development value chain and deliver developmental infrastructure in South Africa and the rest of the African continent. The DBSA focuses on large infrastructure projects within both the private and public sectors for water, energy, transport and information and communication technology. The fund management services offered by DBSA include the DBSA Project Preparation Fund, The Infrastructure Investment Programme for South Africa (IIPSA), SADC Project Preparation and Development Facility (PPDF) and the DEA-funded Green Fund. The Green Fund is a national fund that specifically supports green initiatives that assist South Africa’s transition to a low carbon, resource efficient and climate resilient development path. It is managed by DVS on behalf of the DEA. It aims to provide assistance to projects through grants (recoverable and non-recoverable), loans (concessional rates and terms) and equity. The funding windows are green cities and towns, low carbon economy and environmental & natural resource management. The Green Fund has fully committed its funding allocation and is not currently accepting new applications. Between 2012 and 2017, the Green Fund received roughly R1.1 billion in public funding. This funding has been allocated to a portfolio of 29 investment projects, 16 research and policy-development initiatives and 8 capacity-development initiatives approved for implementation. Private sector commitments to these projects exceeds R600 million, expected to be contributed over the course of implementation. The Green Fund is expected to receive a further R200 million in public funding between 2017 and 2019, but it is not clear whether this will be accompanied by any changes to the fund structure or management entity (National Treasury, 2017) The Green Climate Fund (GCF) is set to become one of the biggest potential donor sources of financing for low carbon projects. However, the related processes and project qualification criteria are still uncertain. In addition, the details of the agreements between the GCF and the (relatively few) agents approved to date are as yet also not finalised. The GCF will have to rely on these selected agents to run projects. Project proponents will need to meet both the GCF and the appointed agents’ requirements. Most of the agents will struggle to engage with individual projects that are not of a large scale (Cloete, et al., 2016). 182 Low carbon finance study (Phase 1 and 2) The World Bank A 5.3.2 Industrial Development Corporation The IDC is owned by the South African Government and was mandated to develop domestic industrial capacity, specifically in manufactured goods. It is a key implementing agency of industrial policy, the IDC's activities currently centre on the National Development Plan (NDP), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP). The IDC identifies sector development opportunities aligned with policy objectives and develop projects in partnership with stakeholders and provides finance for industrial development projects. Their policies are therefore aligned with government policy and commit to developing the country's industrial capacity, as well as playing a major role in facilitating job creation through industrialisation. The IDC's funding is generated through income from loan and equity investments and exits from mature investments, as well as borrowings from commercial banks, development finance institutions (DFIs) and other lenders. The IDC has set a target of providing R5 Billion of funding to renewable energy projects per year for five years (a cumulative target investment of R25 billion), and has also taken the decision to focus on small renewable projects in future. A 5.3.3 International Finance Corporation The IFC focuses on helping the private sector address climate change through investments and innovative financing, and by addressing regulatory and policy obstacles to green growth. It acts as a catalyst to address climate change by finding ways to unlock private capital for climate-smart projects and help finance the development of innovative technologies, therefore encouraging a shift toward energy efficiency and renewable energy. IFC raises all funds for lending activities through the issuance of debt obligations in international capital markets. It is one of the world’s largest financiers of climate-smart projects for developing countries. Their borrowings are diversified by country, currency, source, and maturity in order to provide flexibility and cost effectiveness. The IFC funding program issues bonds in a variety of markets and formats, including U.S. dollar benchmarks bonds, themed bonds that support a specific program such as green bonds. The IFC was one of the earliest issuers of green bonds, launching a green bond program in 2010 to help catalyze the market and unlock investment for private sector projects that support renewable energy and energy efficiency. IFC issues “Use of Proceeds” green bonds which require that proceeds from IFC green bonds are set aside in a designated account for investing exclusively in renewable energy, energy efficiency, and other climate-smart projects in developing countries. Investors in IFC green bonds are not exposed to project risks. IFC also plays a leadership role in developing guidelines and procedures for the green bond market as a member of the Green Bond Principles Executive Committee and the IFI Framework for a Harmonised Approach to Greenhouse Gas Accounting. Table 71 provides a list of identified DFIs, donors and other public sector funds. 183 Low carbon finance study (Phase 1 and 2) The World Bank Table 71: DFIs, donors and other public sector funds and funding pool institutions Institution Type Institution Names • Infrastructure investment programme for South Africa (IIPSA) / DBSA/EU • Small Enterprise Finance Agency (SEFA) • Energy and Environment Partnership • Green Transport Portfolio: SANEDI • SANEDI • TIA Technology Innovation Funds • Wesgro • Free State Development Corporation (FDC) • Gauteng Enterprise Propeller (GEP) • Ithala Development Finance Corporation Limited (Ithala) • Limpopo Economic Development Agency (LEDA) Development • Mpumalanga Economic Development Agency (MEGA) Agency/ DFIs and • North West Development Corporation (NWDC) support agencies • International Climate Initiative (IKI) • Gauteng Growth and Development Agency • Green Cape • Market Connect • DBSA • Jobs Fund • IDC • National Treasury – PPP unit • IPPP Unit • Eastern Cape Development Corporation (ECDC) • Seda (Small Enterprise Development Agency) • Technology Innovation Agency (TIA) • UNIDO - Low emissions transport programme • Department for International Development (DFID) • British High Commission • DFID Strategic Climate Fund • Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ) • UNIDO - SA Energy Partnership • Danish International Development Agency (DANIDA) • Royal Norwegian Embassy / Norwegian Agency For Development (NORAD) • Swiss Agency For Development and Cooperation (SDC)/ SECO • U.S. Agency for International Development (USAID) • United Nations Development Programme (UNDP) • United Nations Environment Programme (UNEP) • Australian Agency for International Development (AusAID) • Austrian Development Agency (ADA) • Canadian International Development Agency (CIDA) Donors and • Department for International Development Cooperation international DFIs • Irish Aid • Japan International Cooperation Agency (JICA) • Netherlands Development Corporation • French Agency for Development (Agence Francaise de Development - AfD) • The European Investment Bank (EIB) • Energy and Environment Partnership for Africa (EEP) Program • RECP (Africa-EU Renewable Energy Cooperation Program) Sustainable Energy Fund for Africa (SEFA) • Facility for Investment in Renewable Small Transactions (FIRST) • PROPARCO • Sustainable Energy Fund for Africa • Norwegian Trust Fund for Private Sector and Infrastructure (NTF-PSI) • Swiss South African Cooperation Initiative (SSACI) • AFDB Africa Climate Change Fund • Clean Technology Fund (CTF) • Global Energy Efficiency and Renewable Energy Fund (GEEEREF) 184 Low carbon finance study (Phase 1 and 2) The World Bank • Nordic Development Fund • GEF Small Grant Programme (part of UNDP) • GEF-Special Climate Change Fund • Global Environmental Facility (GEF) • African Development Bank / SEFA co-sponsored Africa Renewable Energy Fund (AREF) • KfW (German Bank for Reconstruction and Development (Kreditanstalt fur Wiederaufbau)) • DEG • International Finance Corporation (IFC) • Overseas Private Investment Corporation (OPIC) • The African Development Bank (AfDB) • World Bank • Netherlands Development Finance Company (FMO) • French Development Agency (AFD) • Ireland Development Cooperation • Japan Bank for International Cooperation (JBIC) • Renewable Energy and Energy Efficiency Partnership (REEEP) • Swedish International Development Agency (SIDA) • UNEP Energy Finance • Japan Bank for International Cooperation (JBIC) • Central Energy Fund (CEF) / SANEDI? • City of Johannesburg Green Bond • Critical Infrastructure Grant • Municipal Infrastructure Grant • Green Fund • Civil Society Development Fund (CSDF • Department of Energy (DoE) Energy Efficiency and Demand Side Management Programme for Municipalities (EEDSM) Bonds, funds and • National Development Agency (NDA) Fund other funding pools • National Lottery Distribution Trust Fund • National Skills Fund (Departments: Higher Education and Labour) • Sustainable Settlements Facility (SSF) • National Empowerment Fund (NEF) • IDC Green Bond • IDC GEEF • City of Cape Town Green Bond (forthcoming) • IFC Green Bond (listed on JSE) 185 Low carbon finance study (Phase 1 and 2) The World Bank APPENDIX 6 ENERGY INPUT COSTS BASED ON SUPPLY-USE TABLES Table 72 Energy input by sector using Supply-Use tables (2015) – based on supply costs % of total inputs (incl. Mining Manufacturing wages) Nuclear Coke / fuel / Other Non- Gold / Metal Other Iron and Precious Sector Coal Paper petroleu basic chemical Glass metallic PGM ores mining steel metals m chemical s minerals s Coal 0.01% 0.15% 1.03% 0.69% 2.58% 4.42% 0.16% 0.04% 0.09% 1.61% 1.23% 0.02% Petroleum products 2.66% 1.79% 5.67% 3.68% 1.04% 1.18% 6.77% 1.95% 0.00% 0.18% 13.52% 3.03% Electricity and gas 3.15% 2.44% 6.82% 6.73% 2.79% 0.83% 11.11% 4.64% 6.68% 2.71% 6.33% 6.98% (incl. distribution) % of total output Mining Manufacturing Nuclear Coke / fuel / Other Non- Gold / Metal Other Iron and Precious Sector Coal Paper petroleu basic chemical Glass metallic PGM ores mining steel metals m chemical s minerals s Coal 0.00% 0.14% 0.75% 0.48% 2.32% 3.46% 0.15% 0.04% 0.09% 1.38% 1.20% 0.02% Petroleum products 1.55% 1.62% 4.13% 2.58% 0.94% 0.92% 6.39% 1.92% 0.00% 0.15% 13.18% 2.87% Electricity and gas 1.83% 2.21% 4.97% 4.72% 2.51% 0.65% 10.50% 4.56% 6.62% 2.32% 6.17% 6.62% (incl. distribution) 186 Low carbon finance study (Phase 1 and 2) The World Bank APPENDIX 7 BENCHMARKING CHALLENGES This Appendix offers some observations of the challenges in benchmarking a selection of the sectors covered by this study. A 7.1 Mining Determining an energy and GHG emissions intensity for commodities in the mining sector and benchmarking against those in other countries is challenging due to the many variables that impact on these indicators, which include (LCG Energy Management Group, 2009; CIPEC, 2005; Tshisekedi, 2009; Cilliers, 2016): • Whether mines are open-pit or underground • Depth of underground mines • Underground thermal profiles • Vehicles used in opencast mines • Groundwater seepage/pumping requirements • Drilling/blasting requirements • Grinding and crushing requirements • Beneficiation, drying and other processing requirements • Grid electricity emission factors • Methane content in coal seams • Other considerations related to mining practices In addition, it is very difficult to establish comprehensive mine or company specific fuel and emission intensities for South African mines given how data is aggregated in reports presented in the public domain. Mines of different types and data from local with international mines are often aggregated. The potential range of intensity values that can be obtained can be demonstrated using various companies’ data. In coal mining, Anglo American provides sufficient information to calculate a Scope 1 and Scope 2 GHG emissions intensity for their South African and combined Australian/Canadian operations, while Exarro provides information that can be used to calculate the emissions intensity of their South African operations. The data, shown in Table 73, demonstrates the wide range of values obtained. The differences are ascribed to the various factors described above, rather than certain companies/countries necessarily being more efficient than others. Table 73: Emission intensities of two coal mining operations in South Africa Scope 1 emission intensity (kg CO2e/ Scope 2 emission intensity (kg CO2e/ Company tonne coal) tonne coal) Anglo American – South 12 16 Africa Anglo American – Canada/ 168 29 Australia Exxaro 6 14 Source: (Exxaro, 2016; Anglo American, 2015b; Anglo American, 2015a) 187 Low carbon finance study (Phase 1 and 2) The World Bank South Africa operates some of the deepest gold mines in the world, which increases the electricity intensities of mines substantially. Some companies process tailings as part of the operations, which skews the energy and emissions profiles. Furthermore, South Africa contributes to about 80% of the world’s platinum production, resulting in few international benchmarks being available. Examples of the emission intensities of individual operations in South Africa are presented in Table 74. The challenges with benchmarking of the local sector are reinforced by looking at individual mine data. Sibanye’s four gold mines that are included in the overall emissions shown in the table for this company have energy intensity requirements of between 0.43 and 1.15 GJ/tonne milled ore. Similarly, the emissions intensity varies between the two Northam Platinum facilities shown in the table and the other platinum producers in the country. Table 74: Emission intensities of various precious metal mining operations in South Africa Scope 1 emission intensity (tonne Scope 2 emission intensity (tonne Company CO2e/ kg metal) CO2e/ kg metal) Gold Gold fields 1.1 79.4 2 (excluding fugitive emissions) Sibanye 90.8 15.8 (including fugitive emissions) Platinum Anglo Platinum 7.6 72.3 Impala Platinum 4.3 36.9 Northam Platinum - 3.2 75.8 Zondereinde Northam Platinum - 2.2 41.2 Booysendal Source: (Gold Fields, 2016; Gold Fields, 2016; Sibanye, 2014; Anglo American, 2015b; Anglo American Platinum, 2016; Impala Platinum, 2015; Northam Platinum, 2016) Table 75 shows the wide range of emission intensities between the three iron ore mines run by Kumba Iron Ore and between the various Assmang mining divisions. Table 75: Emission intensities of various other mining operations in South Africa Scope 1 emission intensity (kg Scope 2 emission intensity (kg CO2e/ Company CO2e/ tonne product) tonne product) Iron ore Kumba Iron ore Sishen Mine 18.47 13.38 Kolomela mine 8.26 4.96 Thabazimbi mine 7.14 21.43 Assmang 8.81 13.82 Manganese Assmang 4.83 33.91 Chromite Assmang 16.54 62.49 Source: (Kumba Iron Ore, 2016; Assore, 2016) 188 Low carbon finance study (Phase 1 and 2) The World Bank A 7.2 Petroleum products As discussed in the Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014), determining emissions intensities for and the benchmarking of crude refineries is very complicated due to the complexity of production processes and variations in production outputs. This has led to both the European and Californian benchmarking methodologies using a “carbon dioxide weighted tonne” approach (explained in detail in that report) to account for these variables. It was proposed that South Africa adopt a similar approach for setting a benchmark emissions value for crude refineries. There are currently no benchmark values available to directly compare with emissions intensities available from South African operations. Some indication can, however, be obtained of the emissions intensities of South African crude refineries from the open literature. The information that is available is presented below in Table 76, showing the range of emissions intensities across the sector. Table 76: Emission intensities of various crude refining operations in South Africa Scope 1 emission intensity (kg CO2e/ Scope 2 emission intensity (kg CO2e/ Company tonne crude input) tonne crude input) SAPIA (whole 119 43 industry Sapref 151 43 Natref 185 Unknown Enref 139* * - Only reported for emissions overall Source: (SAPIA, 2015; Sapref, 2014; Engen, 2014; Sasol, 2014; Sasol, 2014) A 7.3 CTL and GTL Due to the unique nature of the Sasol CTL plant and the minor use of GTL technology there are no international benchmarks for emissions. Furthermore, the data available in the public domain does not allow for the calculation of emission intensity values for any of the current South African operations. A 7.4 Cement The Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014) discusses in depth the international benchmark values for cement production and how the most applicable benchmarks are quantified in terms of the GHG emissions per tonne of clinker produced. The report proposes that an appropriate clinker benchmark (i.e. taking into account international best practice and adjusting for the local electricity grid mix) for South Africa would lie at the upper region of 0.85 to 1.1 tonnes CO2e/ tonne clinker. The only available emission intensity value available in the public domain to compare this to is from PPC. They reported an intensity of 1.044 tonnes CO2e/tonne clinker in their latest annual report (PPC , 2016) and this value lies close to the upper end of the proposed benchmark value. 189 Low carbon finance study (Phase 1 and 2) The World Bank A 7.5 Iron and steel (including ferro-alloys) Benchmarking in the iron and steel sector is complicated by the fact that iron and steel is produced in integrated facilities that may employ a variety of technologies and produce a number of by- products and waste products that can either be used downstream in the process or sold to other value chains. Coke production by the industry for ferroalloys production is a notable example here. Benchmarks that are available are detailed in their description of scope and methodology (e.g. in terms of treatment of waste fuels). Typically no downstream processing is included in benchmarks and the boundary stops at the production of hot metal. The wide range of emissions intensities reflecting different production routes is demonstrated by analysing the local data as presented in Table 77. Table 77: Emission intensities of various iron and steel works in South Africa Process Scope 1 emission intensity Scope 2 emission intensity (tonnes CO2e/ tonne steel) (tonnes CO2e/ tonne steel) AMSA average 2.22 0.76 Vanderbijlpark Works 2.52 0.7 Saldanha Works 1.93 1.17 Newcastle Works 2.28 0.45 Vereeniging Works 0.42 1.02 Evraz Highveld Steel and Vanadium 8.32 5.94 Columbus 0.39* * - Overall emissions intensity Source: (Arcelor Mittal, 2012; Evraz Highveld, 2010; Acerinox, 2012) International benchmarks are available for best practice energy use as well as emissions intensity, as previously presented in the Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014). The Table below shows proposed electricity and greenhouse gas benchmarks for iron and steel production in South Africa, based on global best practice and the local electricity grid factor. The AMSA emissions are thus higher than global benchmarks, although the comparison is not necessarily relevant as AMSA is likely to have different measurement boundaries. Furthermore, the AMSA Corex/Midrex process at Saldanha is recognised to be unique globally and is thus not covered by internationally available benchmarks. 190 Low carbon finance study (Phase 1 and 2) The World Bank Table 78: Proposed electricity consumption and emission intensity benchmarks (iron and steel sector) Product Indicative benchmark values (tonnes CO2e / tonne product) Coke 0.3-0.5 Sintered Ore 0.2-0.3 Hot Metal (from BF / BOF) 1.4 -1.7 EAF: Carbon steel 0.6 – 0.7 EAF: high alloy steel 0.6– 0.7 Source: (Ecofys and The Green House, 2014) Benchmarking of the ferroalloy industry is complicated by the different products manufactured, coupled with the variety of different production routes used (Ecofys and The Green House, 2014). Emissions intensities for various South African producers in this sector are shown in Table 79. It can be seen that the Scope 2 emission intensities in particular vary widely. Table 79: Emission intensities of various ferroalloy works in South Africa Scope 1 fuel emission Scope 2 emission Process intensity (tonnes CO2e/ intensity (tonnes CO2e/ tonne ferroalloy) tonne ferroalloy Assmang – Machadodorp ferrochrome (now closed) 0.1 0.8 Assmang - Cato Ridge ferromanganese 0.01 2.3 International Ferro Metals - ferrochrome 3.5 Afarak 5.1 Merafe-Glencore - ferrochrome 0.08 3.4 Source: (Assore, 2016; Afarak, 2016; Merafe Resources, 2016; International Ferro Metals, 2015) Table 80: Indicative benchmark values for the South African ferro-alloys sector Benchmark for scope 1 Benchmark for scope 2 emissions emissions 1 Indicative benchmark Product values (tonnes CO2e/ tonne (tonnes CO2e/ tonnes (tonnes CO2e/ tonne ferroalloy) ferroalloy) ferroalloy) Chromium alloys 1.3 1.95 - 3.25 3.25 – 4.55 Manganese alloys 1.3 1.95 - 3.25 3.25 – 4.55 (7% C) Manganese alloys 1.5 2.25 – 3.75 3.75-5.25 (1% C) Silicon alloys (assume 1.5 8.2 9.7 65% Si) Silicon metal 5 10.7 15.7 1 Using a ratio of 1.5 -2.5 between scope 1 and 2 emissions for chromium and manganese alloys. Values for silicon alloys and silicon metal are taken from European Commission Benchmarking Decision (European Commission, 2011) Source: (Ecofys and The Green House, 2014) The Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014) provided indicative benchmark values for South Africa. These were developed based on international data but adjusted for the South African context. Many of the South African producers thus already operate within the benchmark ranges. 191 Low carbon finance study (Phase 1 and 2) The World Bank A 7.6 Pulp and paper Due to the limited company data available the only emission intensity data available is that reported by SAPPI Southern Africa, who reports current Scope 1 and Scope 2 emission intensities as 1.26 and 0.43 tonnes CO2/ tonne air dry tonne product respectively (SAPPI, 2016). The Emissions Intensity Benchmarks for South African Carbon Tax report (Ecofys and The Green House, 2014) proposed benchmark values for South Africa, based on the Australian carbon pricing mechanism. The SAPPI reported values are within the proposed benchmark for indirect emission intensities but are higher than the proposed direct emission intensities. This could be due to different measurement boundaries or that SAPPI data is calculated across their entire range of paper products. APPENDIX 8 STAKEHOLDER ENGAGEMENTS AND SUMMARY OF ANALYSIS A wide range of stakeholders in both the finance and heavy industry sectors were consulted through this study. Consultations ranged from sectoral focus groups to one-on-one interviews with firms, as well as further written input through follow-ups with firms. Given the concentrated nature of these sectors, and to protect the confidentiality of the information providers, only a summary of the number of consultations is provided below. Sector Number and type of stakeholder engagements Heavy industry sector 4 focus groups were held (3 of which yielded useful data for analysis), one-on-one interviews where undertaken with 17 sector representatives or industry associations, and 1 industry association provided data by e-mail. Input from at least one stakeholder from every focus sector was received. Financial sector (including DFIs and donors) 8 one-on-one interviews with firms and written input from 1 firm The following sections provide a summary of analysis, primarily based on feedback from the consultations with heavy industry stakeholders. 3 17 1 A 8.1 Assessment of attractiveness of low carbon investment options The results from the stakeholder consultation with respect to the attractiveness and distribution of low carbon investment options per sector are shown in this section. 192 Low carbon finance study (Phase 1 and 2) The World Bank Table 81: Summary of low carbon investment options Max Payback period (years) Cost (R/tCO2e) Number Number payback of Small Sector of large <3 years 3-6 years 6-10 years > 10 years Unclear <40 40-80 80-120 120-160 period options options (years) Aluminium 1064 2 1 1 6 Cement 3 1 1 1 3 Chemicals - Carbon Black 3 1 2 6 Chemicals - Nitric Acid 2 1 1 6 Chemicals - Polymers 2.5 2 2 7 Coal 2 1 1 3 CTL/GTL 3 6 2 3 1 Ferroalloys 4 1 2 1 4 Glass 3 (5)65 3 1 2 5 Gold & Platinum 2 5 1 2 1 1 3 Iron and Steel 2 7 1 2 2 2 4 Iron Ore 4 1 1 1 1 2 Liquid fuels 3 2 1 4 Paper and pulp 5 2 1 1 1 3 Total number of options (107): 51 6 7 7 15 11 2 1 1 1 56 Source: DNA Economics 64 But only with long-term electricity price contract in place to ensure plant will be in operation long enough for the investment to pay off. 65 5 years only for operational investments. 193 Low carbon finance study (Phase 1 and 2) The World Bank Figure 60 Distribution of financeable low carbon investment options by size 12 10 Unclear (7%) >R1,000m (14%) 8 R500-1,000m (5%) 6 R100-500m (11%) 4 R50-100m (10%) 2 10 years Forex risk Funding General incentives/ Difficult for foreign service providers cannot IDC funding access local support x 2 Grant/ concessionary Too many strings attached funding Long-term PPAs and can access commercial Escalations linked to CPI creates risk when REI4PP/SPIPPPP funding x2 using forex funding Less certainty than feed-in tariff A 8.3 Analysis of low carbon investment opportunities and barriers Figure 63: Barriers to low carbon investment raised by heavy industry Lack of cost pass-through in liquid fuels* Fragmented environmental regulations* Electricity pricing/contracting* Technology risk Require large uniterupted electricity suppy (rely on Eskom) Lack of options Access to waste PPA liability on balance sheet Regulatory/ policy uncertainty* Carbon tax and offsets* Financial viability of projects ESCOs Wheeling/grid access/generation license* Environmental rules and implementation* Uncertain electricity price path* Environmental compliance burden (capital and capacity)* 0 1 2 3 4 5 6 7 8 9 Note: *denotes regulatory barriers. Barriers mentioned only once may be sector- or company specific, and were excluded from figure. A total of 21 barriers were mentioned only once by stakeholders. 6 of these were regulatory barriers and 15 general barriers. Barriers were mentioned 87 times by stakeholders. 199 Low carbon finance study (Phase 1 and 2) The World Bank Figure 64: Recommendations to increase investment in low carbon projects Long-term electricity supply contracts to fix… Provide capital subsidy or upfront funding One-stop shop for environmental regulations Mechanism to fix long-term interest rates in… Instruments to overcome long pay-back periods Import quality inspection Clarify diesel rebate policy Develop LNG market and infrastructure Pool of low cost funding Consistent implementation of National Waste Act Address energy sector policy uncertainty Provide mitigation policy certainty R&D and skills funding Increase ability to feed into grid/wheel power Support to ESCOs/service providers 0 1 2 3 4 5 6 7 8 43 comments from stakeholders or focus groups were captured 200 DNA Economics is an independent research company. 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