South Africa faces an energy transition risk of more than $120bn in present-value terms in 2013-35, according to a study for the South African Reserve Bank (SARB).
This transition risk is largely attributable to the country's coal dependency and a reduced export cash flow of $83.7bn, warn the authors of Transition and systemic risk in the South African banking sector.
The convergence of a carbon-intensive economy, socioeconomic precarity and energy insecurity pose challenges for South Africa's transition, the paper said. "This could have ramifications for the country's commitment under the Paris climate agreement and for risks related to stranded assets and the fiscal consequences of coal export dependence."
The country's historical reliance on coal, both as an energy consumer and as an exporter, and entrenched political-economic dynamics, could present a systemic risk for its financial sector, the study said.
South Africa is the 13th-highest carbon emitter worldwide and the 38th highest on a per capita basis in 2020, making it Africa's leading carbon-emitting country. The country is the fifth-largest exporter of coal, accounting for around 5.5pc of global coal exports in 2022.
South Africa's socioeconomic and sovereign financial soundness is heavily reliant on the coal value chain. The sector employed around 92,000 people in 2022, with the Mpumalanga region particularly dependent on coal mining for employment and regional gross domestic product (GDP).
The coal sector also contributes significant tax revenue through exports and profits generated by the mining and quarry sectors, which comprised 30pc of total corporate tax payments in 2021-22, according to the South African Revenue Service.
But a drastic cut in coal production and use is needed globally, with the current cost to phase out coal estimated at around $29 trillion. As a result, revenues of firms in the coal value chain are likely to fall significantly and their assets will lose most of their value in decommissioning, the report said.
But South Africa's transition can avoid systemic contagion if it is orderly and starts early rather than abruptly, it suggests. This will require long-term planning and communication from the government, stakeholder engagement, compensation and transition aid to affected regions and workers, legislation and definitive timelines backed by law.
Currently, South Africa's policy landscape in terms of a green transition can be described as a "patchwork quilt" — a conglomeration of well-intended strategies marred by ambiguities and inconsistencies, the study said.
On a more positive note, South African coal production has already declined by 40pc over the past decade, it adds. It fell by 3.6pc in 2022, despite coal prices quadrupling during the Covid pandemic.
Global demand is already shifting to cleaner energy sources and, as environmental concerns intensify, the global coal sector will structurally shift, posing challenges to South Africa's economic trajectory and its sovereign financial soundness.
Another significant challenge associated with decommissioning South Africa's coal value chain is energy insecurity, given that state-owned utility Eskom already struggles to keep the lights on, the report said. Rolling power cuts shaved an estimated 0.2 and 2.1 percentage points off the country's GDP in 2022.
A shift from Eskom's ageing fleet of coal-fired plants to more renewables generation will help, but this presents a risk for short-term energy security, the authors point out. Eskom's financial constraints and heavy debt burden also mean it does not have the funds to make the necessary infrastructure investments.
Significant financing is needed to achieve South Africa's emissions commitments, the study said. Stellenbosch University estimates that a just transition would require around $250bn from 2025-35, which is equivalent to 3pc of annual GDP.
The government estimates the initial phase of the just energy transition in 2023-27 will cost nearly $100bn, of which two-thirds will need to be spent on new energy infrastructure.
