World Bank Approves $1B Loan to Advance South Africa's Power Sector Reforms
The World Bank on Oct. 25 granted South Africa a $1 billion developmental policy loan (DPL) as a significant measure to help the country address its debilitating energy crisis, and encourage it to transition to a “just and low-carbon economy.”
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The funding is necessary, the World Bank said, because the country’s ongoing energy crisis “has had a marked negative impact on productivity and safety, at a time when the country has been working to implement a just transition to a low-carbon economy.”
Although South Africa has 54 GW of installed power capacity, state-owned utility Eskom has reported that 23 GW of generation was offline owing to power plant failures and insufficient maintenance (Figure 1). “In 2022, electricity cuts, known as load shedding, averaged eight hours per day, costing 2–3% of GDP [gross domestic product] growth to the economy,” the World Bank said.
According to a June 2023 study supported by British multinational mining company Anglo American, the country’s power crisis—the worst in decades—has had steep economic implications. “Once praised for its provision of mass electrification, low-cost energy and low-grade coal combustion, Eskom is now responsible for 15% of the state’s total debt,” the report says.
“Electricity theft and non-payments by consumers and municipalities continue to drive Eskom’s inefficiencies. More broadly, coal dominates South Africa’s energy mix, powering 80% of system demand, and ageing coal-fired power plants have led to escalated load shedding,” it adds. “Plant breakdowns have also been linked to attrition of skilled workers and poor quality of plant maintenance. In addition, misappropriation of funds from coal supply contracts and confirmed cases of fraud and corruption further exacerbate the crisis. Overall, systemic bureaucracy and a rigid regulatory framework are obstructing the energy transition.”
A Just Energy Transition
The World Bank’s measure arrives as South Africa embraces a “just energy transition” (JET). Adopted by the nation’s cabinet in August 2022, the framework calls for a shift to a low-carbon economy that aligns regulations with the Just Energy Transition Partnership (JETP), a global alliance established by the South African government at COP26 in 2021 with partners that include France, Germany, the UK, the U.S., and the European Union. Since its inception, two new donors—the Netherlands and Denmark—have joined the JETP. In November 2023, the South African Minister of Electricity declared that the amount of financial commitments under the JETP had risen from $8.5 billion to $12.5 billion.
The alliance is expected to mobilize the funding over five years to deliver equitable gains while transforming South Africa’s energy systems. Among its efforts, for example, was to encourage Eskom to decommission the 56-year-old Komati coal-fired plant, and repurpose the project area with renewable power and batteries, creating new opportunities for workers and their communities. But while Komati 9, the last operating unit at the plant, was finally shuttered in October 2022, some observers suggest that progress on the investment plan has “disappointed” if measured against core partnership benchmarks.
The Centre for Africa-Europe Relations in a November 2023 brief suggests that two years into the partnership, “at a a superficial glance, there is reason for gloom.” While South Africa has closed one coal plant, President Cyril Ramaphosa has suggested delays in the decommissioning of eight others, which were slated to close in 2034. And while an implementation plan “needed to set in motion the priority investments,” it had “not been delivered in time as promised.” In addition, in October 2023, “the most powerful trade union in Eskom called for the suspension of the JETP, warning that it threatened 51,000 jobs in the coal and power industries,” the independent think tank noted.
The organization, however, suggests that a “closer look at the energy sector, which is traditionally prone to incumbent power and rent capture, is revealing.” Overcoming a chronic electricity crisis while overhauling a coal-dependent energy system and greening the economy in a just way “is complex, messy and politically challenging,” it said. “Moreover, all this is playing out in a low-growth, high-inequality, middle-income economy and in a young constitutional democracy. Set against this broader canvas, the answer to the question about JETP’s progress and its potential is more nuanced.”
The World’s Bank loan announced in October serves a supportive mechanism. Part of a collaborative effort between the South African government, the World Bank, and three partners—the African Development Bank (AfDB), KfW Development Bank (KfW), and the government of Canada—it will support South Africa’s reforms in two critical ways.
“First, it facilitates restructuring of the power sector through the unbundling of South Africa’s power utility, Eskom. It supports the opening of the power market and aims at improving Eskom’s efficiency by redirecting its resources toward investments in transmission and maintenance of existing power plants,” the World Bank said in a statement. Second, the loan “supports a low-carbon transition by encouraging private investment in renewable energy, including by households and small businesses, and strengthening carbon pricing instruments,” the World Bank said.
Power Reforms Have Been Halting
South Africa has embarked on efforts to unbundle the utility giant into three subsidiaries for generation, transmission, and distribution, but it has so far achieved only a “functional”—not a legal—separation. In July, the National Energy Regulator of South Africa (NERSA) awarded a license to the National Transmission Company South Africa (NTCSA), allowing it to operate the transmission system. And in September, NERSA awarded a five-year trading license for the new company, which allows it to buy and sell power as a commercial activity, as well as an import and export license, which allows it to conduct imports and export power throughout the Southern African Development Community. Plans call for NTCSA to be operational by April 2024.
In September, meanwhile, Minister of Public Enterprises Pravin Gordhan said a new generation operating model had been implemented, though due diligence conducted by the Department of Public Enterprises is still underway. More progress is expected by March 2024.
South African officials lauded the World Bank’s announcement. “This operation comes at a crucial time for South Africa as it will provide much-needed fiscal and technical support, enabling us to pursue our policy priorities in the energy sector, including easing the electricity crisis in the long term, stimulating private sector engagement, and creating jobs in the renewables space,” said Mmakgoshi Lekhethe, deputy-director general of Asset and Liability Management for South Africa’s National Treasury.
—Sonal Patel is a POWER senior associate editor (@sonalcpatel, @POWERmagazine).