World Bank Documentdocuments.worldbank.org/curated/en/308001562592510753/...Low carbon finance in South Africa, Phase 1 & 2 study A working paper for the World Bank February 2018 Public

Low carbon finance in South Africa,

Phase 1 & 2 study

A working paper for the World Bank

February 2018

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3rd Floor, South Office Tower, Hatfield Plaza, 1122 Burnett Street, Hatfield, Pretoria, 0083, South Africa

PO Box 95838, Waterkloof, 0145, South Africa

Tel +27 (0)12 362 0025 | Fax +27 (0)12 362 0210 | Email [email protected] | www.dnaeconomics.com

DNA Economics (Pty) Ltd

Company Registration: 2001/023453/07│Directors: Brent Cloete, Amanda Jitsing, Elias Masilela, Matthew Stern

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

http://www.dnafrica.com/

iii

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

iv


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

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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

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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

vii


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

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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

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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

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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

xi


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

xii


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

xiii


SAPIA South African Petroleum Industry Association

SIC Standard Industrial Classification

SPV special purpose vehicle

VSD variable speed drive

xiv


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).

xv


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.

xvi


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.

xvii


Figure 1: Summary of identified low carbon investment gaps and barriers

Source: DNA Economics

Commercial

factors

Drivers, Gaps and Barriers

Policy

factors

Overall lending

and investment

environment

Market and

investment

structure

Electricity supply and

price uncertainty is

driving energy

efficiency and

renewable energy

investments

Few low carbon

investment options are

suitable for external

financing

Low cost finance and

carbon pricing could

stimulate low carbon

investment

Policy and regulatory

uncertainty

Limited public sector

technical capacity.

Electricity market

reforms and strong

mitigation policy

signals lacking.

Low awareness and use

of existing incentives

Investment criteria for

low carbon projects the

same as standard

investments

Perception of small

market of reputable low

carbon project

implementers and

suppliers

Concessional finance

not viewed favourably

by financiers

Payback periods

generally longer than

desired for low carbon

investments

High transaction costs

relative to project value

is preventing external

financing of smaller

options

Too few large ESCOs

are constraining

investment in both

small and large low

carbon investment

options

Fa

cto

rs in

flu

en

cin

g

dem

an

d f

or

fin

an

ce

Fa

cto

rs in

fluen

cin

g

su

pp

ly o

f fina

nce

xviii


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.

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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)

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

Potential for internal

financing, 56

Potential for external financing, 51

Not considered realistic in SA, 58

Widely implemented/ Limited opportunities remaining, 19

No gas, 9

Other and unclear, 11

Options not feasible, 97

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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

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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.

xxii


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.

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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

xxiv


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.

xxv


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.

xxvi


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.

xxvii


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.

xxviii


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.

1


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 Procurement Programme (REI4P)

US$ 3 billion (R 39 billion) per year

Decarbonised electricity by 2050 US$ 349 billion (R 4,537 billion) between 2010 and 2050

Carbon capture and storage (23 Mt from coal-to-liquid plant)

US$ 0.45 billion (R 5.85 billion)

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.

2


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

3


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.

4


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 CO2e abated based on MPA data was calculated as a NPV of costs assuming a 6% inflation rate.

5


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.

6


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

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.

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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

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.

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8


Figure 5: Private sector employment (Index, 2010 = 100)

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)

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

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9


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.

10


Figure 7: Real GFCF (investment) in South Africa (2010 constant prices)

Total annual GFCF (R billion)

Annual growth in GFCF

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.

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11


Figure 8: Real GFCF (investment) in South Africa (2010 constant prices), by economic activity

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.

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Govt and community services

12


Figure 9: Real GFCF (investment) in mining and manufacturing (2010 constant prices)

Sector share in total annual GFCF

Annual growth in GFCF by sector


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.

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Figure 10: Real fixed capital stock by sector (constant 2010 prices)

Capital stock – R billions

Annual change in fixed capital stock


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.

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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.

15


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)

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).

Exports, 63.58Local production,

50.65

Imports, 0.42

Domestic consumption; 51.07

Mining of coal and lignite- production and consumption

16


Figure 12: Coal production (Index, 2010 = 100)


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)

Source: DNA Economics based on data from ITC Trademap

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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.

18


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.

19


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)


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.

Exports, 273.39 Local production, 64.24

Imports, 3.88


Mining of gold, uranium and metal ores- production and consumption

20


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)


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.

0

20

40

60

80

100

120

2008 2009 2010 2011 2012 2013 2014 2015 2016

PGMs Gold

21


Figure 16: South Africa’s PGM exports and imports (R million)


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)

12 The 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).

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Exports Imports

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Exports Imports

22


Source: DNA Economics based on data from Department of Trade and Industry (DTI)


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


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

23


concentrate production, confirming its strategy to become a significant player in the platinum industry

(Mining Review Africa, 2017).


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).

24


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)


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.

0

50

100

150

200

250

2008 2009 2010 2011 2012 2013 2014 2015 2016

Iron ore Chromium Manganese ore Other metallic minerals

25


Figure 19: South Africa’s other mining exports and imports (R million)

Source: DNA Economics based on data from Department of Trade and Industry (DTI)


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.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

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

26



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

27


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)


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)

Exports, 36.59

Local production, 72.66

Imports, 43.87


Nuclear fuel; and basic chemicals-production and consumption

Exports, 13.68


Imports, 57.09


Other chemical products, and man-made fibres- production and consumption

28



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)


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.

0

20

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013 2014 2015 2016

Basic chemicals Other chemical products

29


Figure 23: Chemicals sector capacity utilisation (percentage)


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)


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

0

10

20

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012 2013 2014 2015 2016

Basic chemicals Other chemicals

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Basic chemicals Other chemicals

30


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).


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)


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

31


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)


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.

Exports, 20.73


Imports, 49.38


Coke oven products; and petroleum refineries/ synthesisers- production and consumption

32


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


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)


0

20

40

60

80

100

120

0

20

40

60

80

100

120

2008 2009 2010 2011 2012 2013 2014 2015 2016

Ca

pa

city

utilis

atio

n (%

)

Pro

du

ctio

n (2

01

0 =

10

0)

Production (2010 = 100) Capacity utilisation (%)

0

50,000

100,000

150,000

200,000

250,000

300,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Exports Imports

33



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

Petroleum Refineries Ownership Refinery capacity

[bbl/day] Refining capacity (% of

total SA capacity)

Sapref Shell South Africa (50%)- BP Southern Africa (50%)

180,000 34%

Enref Engen Petroleum 135,000 25%

Chevref Chevron South 110,000 21%

Natref Sasol (64%)- Total South

Africa (36%) 108,500 20%

Coal and Gas Refineries Ownership Refinery capacity


total SA capacity)

Sasol Secunda (Synfuels) Sasol 150 000 100%

Gas Processed Refineries Ownership Refinery capacity


total SA capacity)

PetroSA PetroSA 45 000 100%


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

34


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


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.

35


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)


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.

Exports, 2.98


Imports, 8.83


Non-metallic mineral products- production and consumption

36


Figure 29: Non-metallic mineral production and capacity utilisation


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)


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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%


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.

38


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)


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

Exports, 65.77


Imports, 18.72


Iron and steel and casting of metals- production and consumption

39


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


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.

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Figure 33: South Africa’s iron and steel exports and imports (R million)


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)


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.

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41


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.


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.


Iron and Steel

42


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.

43


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)


Figure 36: Basic precious and non-ferrous metal products production and capacity utilisation


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

Exports, 46.24 Local production,

3.52

Imports, 51.8


Precious metals and non-ferrous metals- production and consumption

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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)


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.

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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)

Exports, 0.51


Imports, 3.26


Glass and glass products- production and consumption

46



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


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.

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Figure 40: South Africa’s glass exports and imports (R million)



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%


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).


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

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48


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)


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.

Exports, 10.16


Imports, 11.42


Paper and paper products- production and consumption

49


Figure 42: Paper and Pulp Products- Production (2010 = 100) and capacity utilisation (%) (SIC:323)


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)


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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).


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.

51


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.

52


(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.

https://www.statssa.gov.za/additional_services/sic/mdvdvmg3.htm#352

53


Table 7: Energy input by sector using Input-Output tables (2014) – based on input costs

% of input costs (incl. wages)


Sector Coal Gold / PGM

Other Pulp and

paper

Coke oven /

petroleum products

Basic chemicals

and nuclear

fuel

Other chemicals

Glass Non-

metallic minerals

Iron and steel

Non-ferrous metals

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 (production cost)



Other Pulp and

paper

Coke oven /

petroleum products

Basic chemicals

and nuclear

fuel

Other chemicals

Glass Non-

metallic minerals

Iron and steel

Non-ferrous metals

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%

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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

2007

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 supplies by 16:40 as generation units returned to service. Eskom systems allow power 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

Low-Medium

2008

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 supply interruptions, as load shedding had to be implemented to manage the energy shortage

High

2009

There has been no load shedding since April 2008

None

2010 None

2011 None

2012 No load shedding despite supply-demand challenges, Eskom continued to avoid load shedding in 2011/12, as it has since April 2008

None

2013 Eskom’s generation fleet met demand requirements without load-shedding in 2012/13. None

2014 Eskom declared four power system emergencies on 19 November 2013, on 20 and 21 February 2014 as well as on 6 March 2014. Rotational load shedding was implemented for 14 hours on 6 March 2014

Low-Medium

2015

During 2014/15, a substantial number of load reduction events occurred when the available supply was insufficient to meet the demand. Load shedding was implemented and/or load curtailment on 34 days between 1 November 2014 and 31 March 2015

High

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).

55


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)

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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)


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)

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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 1 (2011)

Bid Window 2 (2012)

Bid Window 3 (2013)

Bid Window 3.5 (2014)

Bid Window 4 (2015)

Reduction in 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)

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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

Fuel type TJ % of total

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.

22 Gas 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.

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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.

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Figure 48 GHG emissions profile of the mining and quarrying sector


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%


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).

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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)

Emissions Coal mining

Percentage contribution to 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)


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.

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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


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%


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

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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

Fuel type Manganese (TJ) Percent of total Chromite (TJ) Percent of

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).

26 The split between Scope 1 and Scope 2 emissions is thus different to what it would be if calculated from the energy balance data.

64


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


Coal

Anthracite 467 0.3%


Gas works gas 5,610 3.8%

Natural gas 45,578 31%


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

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Figure 49 Energy balance data for the chemical and petrochemical sector over time


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

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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


Refinery gas 4,399 9.0%


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 gas 16,508 84.1%

Light fuel oil 869 4.4%


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).

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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


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

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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



Gas works gas 368 0.6%

Natural gas 15,164 26.2%


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


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.

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Table 28: Energy usage by PPC (cement producer) in 2014 financial year


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%


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.

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• 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


Coal

Anthracite 15,704 6.5%


Coke oven coke 5,643 2.3%

Natural gas 10,285 4.2%


Coke oven gas 23,666 9.7%

Blast furnace gas 23,363 9.6%


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.

71


Figure 51 Energy balance data for iron and steel and ferroalloys over time


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



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).

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Table 32: Energy usage by Exxaro Ferroalloys in 2016


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


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


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)

29 The 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.

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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


Coal






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

74


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.

75


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





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

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Figure 52 Energy balance data for the paper, pulp and print sector over time


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)

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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)

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).

Insurers, 2,770

Private retirement funds, 993

PIC, 1,887

Other*, 2,962

Fixed-interest securities, 2,546

Shares and other equity, 4,806

Loans, 451

Other assets^, 809

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

By institution By classification

R b

illio

ns

78


Figure 54: Domestic credit extended by South African monetary sector, 2016 (R billion)

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)).

Households, 1,486

Companies, 1,766

Government sector, 184

0

500

1,000

1,500

2,000

2,500

3,000

3,500

R b

illio

ns

79


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

80


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)

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• 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.

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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.

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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.

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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

Debt servicing and recourse

Generally have recourse to borrowing firm’s assets and cash flows.

Recourse limited to cash flows and assets of project being financed, through the creation of a SPV.

Term structure and cost of financing

On-balance sheet lending is typically of a shorter term and can generally be sourced at a cost directly related to the borrowing firm’s credit and operating risk profile.

Cost of financing will be directly related to expected cash flows for the project.

Structuring and transaction costs

Financing can be structured and arranged relatively quickly between the financier and the investee.

Transaction costs are comparatively lower for on-balance sheet lending.

Project based finance can be complex to structure and arrange given the role players and stakeholders that may be involved in the transaction.

Related to this, project-based finance transactions costs are generally higher.

Financiers may also more closely evaluate 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.

Size of projects to be financed

Suitable for smaller projects, where financing sourced does not materially impact on firm’s debt-equity structure.

Can be utilised for any size project but suitable for larger projects given relatively higher 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.

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Figure 55: Financing instruments available for low carbon investments

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.

Modes Finance instruments

Market vehicles

Asset category Instrument Project-based Corporate

balance sheet / other

Capital pool

Fixed income

Bonds

Project bonds

Corporate bonds, Green bonds

Bond indices, Bond funds, ETFs

Municipal, Sub-sovereign bonds

Green bonds Subordinated bonds

Loans

Direct/Co-investment lending to project, Syndicated project loans

Direct/Co-investment lending to corporate

Debt Funds (GPs)

Syndicated loans, Securitized loans (asset backed securities (ABS)), Collateralised Loan Obligations (CLOs)

Loan Indices, Loan Funds

Mixed Hybrid Subordinated loans/bonds, Mezzanine finance

Subordinated bonds, Convertible bonds, Preferred stock

Mezzanine Debt Funds (GPs), Hybrid Debt Funds

Equity

Listed YieldCos Listed stocks, Closed-end Funds, REITs, IITs, MLPs

Listed Infrastructure Equity Funds, Indices, trusts, ETFs

Unlisted

Direct/Co-Investment in infrastructure project equity, PPP

Direct/Co-Investment in infrastructure corporate equity

Unlisted infrastructure funds

86


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.)

87


Figure 56: ESCO revenue and operating models

Shared savings model

Guaranteed savings model

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 typically carries out the financing

• ESCO carries performance risk and energy –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 financing, but still requires a creditworthy customer

• Requires creditworthy customer

• Extensive measurement and verification (M&V) • Extensive measurement and verification (M&V)

• Favours large ESCOs, small ESCOs become too leveraged to do more projects

• ESCO can do more projects without getting highly geared

• Favours projects with short payback due to higher financing costs

• More comprehensive project scope due to lower 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

FINANCIAL INSTITUTION

ESCO END USER

Loan Repayment from portion

of savings share

Project development,

financing and

implementation

Payment based

on savings share

Payment for

services

Project

development and

implementation

FINANCIAL INSTITUTION

Loan Repayment with funds based

on savings guarantee from

ESCO

END USER ESCO

Arrange financing

Savings guarantee

88


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.

89


Table 41 Low carbon investment options in coal mining

Description of low carbon investments

Type of investment

Attractive for external

finance

Currently implement-able

in South Africa

Scale of investment

(Rm)

Indicative payback period

(years) or indicative

cost (R/tCO2e)

Improve energy efficiency of mine haul and transport operations - capex

Energy efficiency

Yes Yes >1,000 6-10 years

Onsite clean power generation - CSP

Electricity generation

Yes Yes >1,000 > 10 years

Optimise existing electric motor systems (controls and VSDs)

Energy efficiency

No - but could be bundled

Yes <50 3-6 years

Process, demand & energy management system.

Energy efficiency


Yes <50 Unclear

Energy efficient lighting Energy

efficiency


Yes <50 Unclear

Improve energy efficiency of mine haul and transport operations - opex

Energy efficiency

No

Widely implemented/

Limited opportunities

remaining

50-100 3-6 years

Install energy efficient electric motor systems

Energy efficiency

No No39 100-500 6-10 years

Use of 1st generation biodiesel (B5) for transport and handling equipment

Fuel switch No40 Unclear 50-100 Unclear

Use of 2nd generation biodiesel (B50) for transport and handling equipment

Fuel switch No No


Fuel switch No No

Coal mine methane recovery and utilisation for power and/or heat generation


No No 50-100 6-10 years

Coal mine methane recovery and destruction by flaring

GHG emissions abatement

No No <50 <40

R/tCO2e

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.

90


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


Type of investment

Attractive for

external finance


in South Africa

Scale of investment

(Rm)



cost (R/tCO2e)

Install energy efficient electric motor systems41

Energy efficiency

Yes Yes >1,000 <3 years

Onsite clean power generation - PV


Yes Yes >1,000 Unclear

Improve energy efficiency of mine haul and transport operations - capex

Energy efficiency


Onsite clean power generation - CSP



Cogeneration42 Electricity generation

Yes Yes 100-500 6-10 years

Optimise existing electric motor systems (controls and VSDs)43

Energy efficiency


Yes <50 3-6 years

Process, demand & energy management system

Energy efficiency


Yes <50 Unclear


efficiency


Yes <50 Unclear


Fuel switch No Unclear 50-100 Unclear


Fuel switch No No


Fuel switch No No

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.

91



Type of investment

Attractive for

external finance


in South Africa

Scale of investment

(Rm)



cost (R/tCO2e)

Onsite clean power generation - smaller options (mini hydro and air/water turbines)44


No Unclear <50 <3 years

Improve energy efficiency of mine haul and transport operations - opex

Energy efficiency

No

Widely implemented/


remaining

100-500 <3 years

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


Type of investment


finance


in South Africa

Scale of investment

(Rm)



cost (R/tCO2e)

Improve energy efficiency of mine haul and transport operations

Energy efficiency


Onsite clean power generation




Fuel switch Yes Yes 50-100 <40

R/tCO2e

Switching from diesel to electric haulage with overhead lines.

Fuel switch Yes Yes Unclear Unclear


Energy efficiency


Yes <50 Unclear


efficiency


Yes <50 Unclear

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.

92



Type of investment


finance


in South Africa

Scale of investment

(Rm)



cost (R/tCO2e)


Energy efficiency

No

Widely implemented/


remaining

100-500 <3 years


Energy efficiency

No

Widely implemented/


remaining

>1,000 <3 years

Cogeneration45 Electricity generation

No No


Fuel switch No No


Fuel switch No No

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.

45 A stakeholder indicated that there is unlikely to be sufficiently large sources of unutilised heat at open-cast mining operations to support this option.

93


Table 44 Low carbon investment options in nitric acid production


Type of investment

Attractive for

external finance

Currently implement-

able in South

Africa

Scale of investment

(Rm)



cost (R/tCO2e)

Combined heat and power (CHP) Electricity generation


N2O abatement for new and existing production plants


Yes Yes 100-500 40-80

R/tCO2e

Advanced process control Energy

efficiency


Yes <50 Unclear

Energy monitoring and management system

Energy efficiency


Yes <50 Unclear

Increase process integration and improved heat systems

Energy efficiency


Yes <50 Unclear

Energy efficient utility systems Energy

efficiency


Yes <50 Unclear

Improved electric motor system controls and VSDs

Energy efficiency


Yes <50 Unclear

Energy efficient boiler systems and kilns

Energy efficiency


Yes <50 Unclear

CCS for new ammonia production plants process emissions

CCS No No

Niche plastics and biofuels opportunities linked to biomass feedstock for Nitric Acid plants

Production pathway

shift No No

Revamp: increase capacity and energy efficiency

Energy efficiency

No No

Replace coal-fired partial oxidation processes with natural gas-fired steam reforming production [Ammonia production]

Fuel switch No No

Use of hydrogen from renewable sources

Fuel switch No No

Membrane separation Energy

efficiency No No

94


Table 45 Low carbon investment options in polymer production


Type of investment

Attractive for

external finance


able in South Africa

Scale of investment

(Rm)



cost (R/tCO2e)

Efficient steam utility in industrial hub

Energy efficiency

Yes Yes Unclear Unclear

Clean energy generation - PV Electricity generation

Yes Yes 50-100 Unclear


Energy efficiency


Yes <50 Unclear


efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear

Energy efficient utility systems Energy

efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear

Combined heat and power (CHP)


No

Widely implemented/


remaining

Biomass as a feedstock Production

pathway shift No No


Fuel switch No No


efficiency No No

Waste heat and/or gas energy recovery and utilisation for cogeneration


No

Widely implemented/


remaining

95


Table 46 Low carbon investment options in carbon black production


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback

period (years) or indicative

cost (R/tCO2e)

Combined heat and power (CHP)



Biomass as a feedstock Production

pathway shift Yes Yes Unclear Unclear

Tail-gas energy recovery for combined heat and power plant (CHP) and minimise flaring


Yes Yes 100-500 Unclear


efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear

Energy efficient utility systems

Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency

No No


Fuel switch No No


efficiency No No



No

Widely implemented/


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.

96


Table 47 Low carbon investment options in refining


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Improved heat exchanger efficiencies

Energy efficiency

Yes Yes 100-500 > 10 years


Energy efficiency


Minimise flaring and utilise flare gas as fuel.



Improve process heater efficiency

Energy efficiency


Yes <50 Unclear

Improve steam generating boiler efficiency

Energy efficiency


Yes <50 Unclear

Energy management and monitoring system

Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear

Improved process control Energy

efficiency No

Widely implemented/


remaining

50-100 6-10 years

Waste heat recovery and utilisation

Energy efficiency

No No

Waste heat boiler and expander applied to flue gas from the FCC regenerator/Improve energy efficiency of catalytic cracking

Energy efficiency

No No

Efficient energy production (CCGT and CHP)


No No

CCS - Existing refineries CCS No No

CCS - New Refineries CCS No No

Use refinery fuel gas (RFG) instead of HFO

Fuel switch No

Widely implemented/


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

97


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


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Improved heat systems Energy

efficiency Yes Yes >1,000 > 10 years

Energy monitoring and management systems

Energy efficiency



efficiency Yes Yes Unclear > 10 years


Energy efficiency



Energy efficiency


Increase onsite gas-fired power generation - using internal combustion engines


Yes Yes >1,000 120-160 R/tCO2e

Waste gas recovery and utilisation


No No >1,000 > 10 years

Waste heat recovery power generation


No No

CCS - process emissions from existing plants (storage onshore)

CCS No No

CCS - process emissions from existing plants (storage offshore)

CCS No No

CCS - process emissions from new plants

CCS No No

CCS - CO2 capture and compression

CCS No Unclear

Upgrade feed compressors Energy

efficiency No

Widely implemented/


remaining


Energy efficiency

No Unclear

Conversion of feedstock from coal to natural gas

Fuel switch No No (lack of

gas)

Increase onsite gas-fired power generation - using gas turbines


No No (lack of

gas)

98


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.

46 South 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).

99


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


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)


efficiency Yes Yes 50-100 > 10 years

Waste heat recovery from kilns and coolers/cogeneration


Yes Yes 500-1,000 Unclear

Utilise waste material as fuel

Fuel switch Yes Yes 50-100 <40 R/tCO2e


Energy efficiency


Yes <50 Unclear

Energy-efficient utility systems

Energy efficiency


Yes <50 Unclear

Improved electric motor system controls and variable speed drives

Energy efficiency


Yes <50 Unclear

Reduction of clinker content of cement products

Energy efficiency

No

Widely implemented/


remaining

50-100 > 10 years

Utilise natural gas47 Fuel switch No No (Lack of

gas)

Geopolymer cement production

Production pathway shift

No No

CCS - back-end chemical absorption

CCS No No

CCS - oxyfuelling CCS No No

Fluidized bed cement kiln Production

pathway shift No No

CSA Belite Cements Production

pathway shift No No

Magnesium oxide cements Production

pathway shift No No

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.

100



Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Implement kiln systems with multistage cyclone preheaters and precalciner

Technology substitution

No

Widely implemented/


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


Type of investment

Attractive for

external finance


able in South

Africa

Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Top gas pressure recovery turbine

Energy efficiency


BOF waste heat and gas recovery

Energy efficiency

Yes Yes 500-1,000 6-10 years


Energy efficiency

Yes Yes 100-500 <3 years

State-of-the-art power plant Electricity generation



Energy efficiency






Energy efficiency


Yes <50 Unclear


efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 > 10 years

101



Type of investment

Attractive for

external finance


able in South

Africa

Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

CO2 capture and sale CCS Unclear Unclear

Electric arc furnace (EAF) and secondary production route


No No48 >1,000 Unclear

DRI – HYL Technology substitution

No No (lack of

gas) >1,000

80-120 R/tCO2e

DRI – Midrex Technology substitution

No No (lack of

gas) >1,000

80-120 R/tCO2e

The use waste plastic in blast furnaces

Fuel switch No No

Use of natural gas in blast furnaces

Fuel switch No No (lack of

gas) Unclear Unclear

DRI - ULCORED Technology substitution

No No

State-of-the-art power plant (with CCS)

CCS No No

Top gas-recycling blast furnace (with CCS)

Energy efficiency

No No

CCS - Blast Furnace (post-combustion)

CCS No No

Hlsarna Technology substitution

No No

Electrolysis as an alternative to traditional furnaces


No No

Hydrogen reduction Fuel switch No No

Onsite clean power generation - Gas


No No

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.

102


Table 51 Low carbon investment options in ferroalloys


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Waste heat recovery - from semi-closed furnace - Rankine Cycle


Yes Yes 500-1,000 Unclear

Waste heat recovery- from semi-closed furnace - Organic Rankine Cycle




Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear

Replace submerged arc furnace semi-closed with closed type


Unclear Unclear 500-1,000 3-6 years

Waste gas recovery and power generation - CO from closed furnace


Unclear Unclear 100-500 <3 years

Implementing best available production techniques49

Energy efficiency

No

Widely implemented/


remaining

500-1,000 6-10 years

On-site clean power generation - RE


No No

Use biocarbon reductants instead of coal/coke

Energy efficiency

No No

On-site clean power generation - Offgas to biofuel via algae


No No

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.

103


Table 52 Low carbon investment options in aluminium smelting


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Cathode redesign Energy

efficiency Yes Yes 50-100 3-6 years

Spray coating for anodes Energy

efficiency Yes Yes >1,000 <3 years

Best process selection for primary aluminium smelting / technology upgrade options

Energy efficiency


Yes <50 6-10 years


efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear

Improved explosion welding Energy

efficiency


Yes <50 3-6 years

Energy Monitoring and Management System

Energy efficiency


Yes <50 Unclear


Energy efficiency


Yes <50 Unclear

Switch to secondary production and increase recycling


No

Widely implemented/


remaining

500-1,000 <3 years

Clean on-site power generation


No No Unclear

Clean on-site power generation - Gas


No No

Convert existing technology to PFPB technology


No

Widely implemented/


remaining

Lower electrolysis temperature

Energy efficiency

No No

Application of a dynamic AC magnetic field

Energy efficiency

No No

Wetted drained cathodes (linked to inert anodes)


No No

Inert Anodes Technology substitution

No No 50-100 <3 years

Carbothermic reduction Technology substitution

No No

104


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


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Onsite clean power generation (PV)



Vertically fired furnaces Energy

efficiency Yes Yes 50-100 > 10 years

More Efficient Forehearths Energy

efficiency


Yes <50 <3 years

Batch and cullet pre-heating

Energy efficiency


Yes <50 <3 years

Forhearths process control Energy

efficiency


Yes <50 <3 years

Computerised process control

Energy efficiency


Yes <50 <3 years

Adjustable speed drives on combustion air fans and compressor motors

Energy efficiency


Yes <50 <3 years

Oxy-fuel Furnaces Energy

efficiency Unclear Unclear 50-100 > 10 years

Minigrids Electricity generation

No No

Increased Cullet Use Production

pathway shift No

Widely implemented/


remaining

<50 <3 years

Regenerative furnaces Energy

efficiency No

Widely implemented/


remaining

Selective batching Production

pathway shift No No

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Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Oscillating Combustion for Glass Production


No No

Waste heat boilers Electricity generation

No No

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


Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Convert fuel from coal to biomass/residual wood waste

Fuel switch Yes Yes 100-500

6-10 years (with CDM

funding), 80-120 R/tCO2e (without CDM

funding)

Biomass for electricity generation



Energy efficient boiler systems and kilns and Improved heat systems

Energy efficiency

Yes Yes 50-100 <3 years

Application of Co-generation of Heat and Power (CHP)


Yes Yes 500-1,000 3-6 years

Mini hydro50 Electricity generation

Yes Yes <50 <3 years


Energy efficiency


Yes <50

Energy-efficient utility systems (e.g. lighting, refrigeration, compressed air)

Energy efficiency


Yes <50


efficiency


Yes <50

50 A 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.

106



Type of investment

Attractive for

external finance



Scale of investment

(Rm)

Indicative payback


cost (R/tCO2e)

Coal waste-biomass pellets Fuel switch No51 Unclear Unclear Unclear

Energy efficient electric motors, improved controls and variable speed drives

Energy efficiency

No

Widely implemented/


remaining

50-100 > 10 years

Gasification of Black Liquor Electricity generation

No No

Energy efficient Thermo Mechanical Pulping (TMP)

Energy efficiency

No No

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.

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Figure 57: Summary of identified low carbon investment gaps and barriers


Commercial

factors

Drivers, Gaps and Barriers

Policy

factors

Overall lending

and investment

environment

Market and

investment

structure

Electricity supply and

price uncertainty is

driving energy

efficiency and

renewable energy

investments

Few low carbon

investment options are

suitable for external

financing

Low cost finance and

carbon pricing could

stimulate low carbon

investment

Policy and regulatory

uncertainty

Limited public sector

technical capacity.

Electricity market

reforms and strong

mitigation policy

signals lacking.

Low awareness and use

of existing incentives

Investment criteria for

low carbon projects the

same as standard

investments

Perception of small

market of reputable low

carbon project

implementers and

suppliers

Concessional finance

not viewed favourably

by financiers

Payback periods

generally longer than

desired for low carbon

investments

High transaction costs

relative to project value

is preventing external

financing of smaller

options

Too few large ESCOs

are constraining

investment in both

small and large low

carbon investment

options

Fa

cto

rs in

flu

en

cin

g

dem

an

d f

or

fin

an

ce

Fa

cto

rs in

fluen

cin

g

su

pp

ly o

f fina

nce

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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.

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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

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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 internal

financing, 56

Potential for external financing, 51

Not considered realistic in SA, 58

Widely implemented/ Limited opportunities remaining, 19

No gas, 9

Other and unclear, 11

Options not feasible, 97

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.

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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

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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.

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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 Africa (NERSA)

Regulates the energy sector in the context of national policy and planning, 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 (DPE)

Shareholder in Eskom, the sole power off-taker from independent power projects larger than 1MW.

Department of Economic Development (EDD)

Sets and develops economic policy, economic planning and economic development; focuses on employment creation and the green economy

Department of Environmental Affairs (DEA)

Sustainable development and environmental integrity; grants 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 municipalities

Regulate private renewable energy generation (embedded generation) through by-laws and policies

Source: Adapted from WWF (2017)

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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).

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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.

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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

60 South 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.

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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.

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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:

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• 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.

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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.

121


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

122


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.

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.

123


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142


APPENDIX 1 CONTEXTUALISING SA’S CLIMATE CHANGE POLICY

Internationally, South Africa is a signatory to several treaties aimed at transitioning to a low carbon

economy that supports environmental sustainability. 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

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).

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)

Bio-Economy

Strategy (2013)

Agriculture and

Rural Development

Plan (2011)

Integrated

Resource Plan

(2011)

Environmental

Fiscal Reform

Policy Paper (2006)

National

Biodiversity

Strategy and Action

Plan (2005)

National Waste

Management

Strategy (2011)

National Transport

Master Plan (2007)

Renewable Energy

Strategy (2003)

Industrial Policy

Action Plan

(Various)

10-Year Innovation

Plan (2007)

National Skills

Development

Strategy III (2013)

White Paper on

National Transport

Policy (1996)

Energy Efficiency

Strategy (2005)

Green Economy

Accord (2011)

National Water

Resource Strategy

(2013)

143


Table 55: Summary of selected state-led policies and initiatives geared towards climate change

Initiative and/or framework

Policy goals and objectives Green economy focus Green economy

indicators/outcomes Specific green

economy commitments

National Strategy for Sustainable Development 2011-2014 (NSSD1) (DEA, 2008)

It is a proactive strategy that regards sustainable development as a long-term commitment, which combines environmental protection, social equity and economic efficiency with the vision and values of the country. It is an ongoing process of developing support, and initiating and upscaling actions to achieve sustainable development in South Africa. Transition towards a green economy is identified as one of the five strategic priorities of NSSD. The objective of the priority is to facilitate a fair transition towards resource efficiency, low carbon and pro-employment growth path.

• Progress on the implementation of nine green economy programmes: impact on jobs, industry development and ecosystem benefits

• Financial resources for green economy investments

• Registered innovation is the form of intellectual property

• Share of GDP of the Environmental Goods and services

• IDC ring-fenced R11,7 billion

• DBSA: R25 billion

• National Treasury R800 million

• Private Sector > R100 billion

National Development Plan

(NDP),2011 (National Planning Commision, 2011)

The National Development Plan is South Africa’s long-term overarching development plan. It is a ‘framework for economic policy as the driver of the country’s jobs strategy’, and specifically aims to maximise the creation of ‘decent work opportunities’ by focusing on labour-intensive sectors and increasing investment in labour-absorbing activities. Its ultimate goal is to grow employment by 5 million jobs by 2020, in order to narrow unemployment from 25% to 15%.

Chapter 5 of the NDP tables a vision for South Africa to transition towards a low carbon, resilient economy and a just society The path to achieving the vision requires long-term strategies and steps to reduce dependency on carbon, natural resource and energy while balancing objectives to increase employment and reduce inequality

• Near term actions (by 2015): development of market based instruments, partnerships for adaptation and mitigation actions, implement Carbon Tax, and investments into R&D, infrastructure

• Medium term actions (by 2020): Establish a culture of energy efficiency, embed resilience planning in all planning processes, carbon budgets approach an important element to policy development

• Long-term actions (by 2030): Earlier investments are paying off and resulting in inclusive economic growth

N/A

New Growth Path(NGP) (Accord 4: Green Economy

Accord), 2011 (Economic

Development Department, 2011)

Government adopted the New Growth Path (NGP) as the framework for economic policy and the driver of the country’s jobs strategy. The key drivers of employment creation identified in the New Growth Path are:

• Substantial public investment in infrastructure to create employment both directly and indirectly by improving efficiency across the economy;

The NGP identities the green economy as one of the six key sectors to drive industrial development and job creation. The Accord prioritised manufacturing and green industries through a localised strategy. Aggressive investments commitments are made.

• Employment targets: 300 000 additional direct jobs by 2020, of which 80 000 in manufacturing and the rest in construction, operations and maintenance, rising to well over 400 000 by 2030

• Achieved though commitments into 12 thematic area such as renewable energy-solar water heating, energy efficiency, waste recycling programmes, green buildings & bio-fuels etc.

• Commitments were made by various stakeholder to : set aside capital allocation, provide incentives through regulation, and build capacity and skills towards a green economy

• The timelines for the commitments range from the near term

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economy commitments

• Targeting more labour-absorbing activities in the main economic 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.

(2016) and the medium term (2020).

Industrial Policy Action Plan (first and

subsequent versions)

The Industrial Policy Action Plan is a key pillar in the implementation of the New Growth Path. The plan stems from the 2007 National Industrial Policy Framework, which set out government’s long-term approach to industrialisation. The first plan was released in 2007 and, since 2010, the plan has been revised annually. The most recent IPAP (2016/17 – 2018/19) aims to focus interventions in 13 sectors in the broad manufacturing industry.

The IPAP prioritises growth in green and energy saving industries trough the design of industry specific incentives. The IPAP aims to strike a balance between creating and growing new sectors whilst stabilising and rejuvenating existing industries.

• Emphasis on green industries, renewable energy and energy efficiency sectors.

• Highlights the need for new procurement regulations and industrial financing

• Outcomes include: a low carbon roadmap for the manufacturing sector, increased local content threshold for renewable sector, & designated energy-efficiency products in support of the development of a competitive local manufacturing industry.

N/A

National Climate Change Response

Policy (NCCRP), 2011 (DEA, 2011a)

Effectively managing inevitable climate change impacts through building resilience and response capacity; and making a fair contribution to the global effort to stabilise greenhouse gas (GHG) concentrations. The NCCRP aims to promote investment in human and productive resources that will facilitate the growth of the green economy. The NCCRP states that government will have to increase the mobility of labour and capital out of carbon intensive sectors and industries and move towards greener productive sectors and industries.

• The NCCRP outlines the county’s approach to mitigation and adaptation and frames priorities in terms of key near term priority flagship programmes

• The document calls for a reduction in greenhouse gas, ensuring community and ecosystems resilience and reducing dependency on fossil fuels.

N/A

South Africa’s Nationally

Determined

The South African NDC provides adaptation strategies of six goals as well as adaptation plans, costing of adaptation investment requirements, equity, and means of implementation. The mitigation component of the INDC Peak, plateau

• Development of national adaptation plan, an early warning vulnerability and adaptation monitoring system

Ensure commitment to the Paris Agreement

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economy commitments

Contribution (INDC, 2015)

and decline (PPD) is a GHG emissions trajectory range which is supported through the carbon tax policy.

vulnerability assessment and adaptation needs framework

• Achieve peak, plateau and decline GHG emissions trajectory range

Draft Carbon Tax Bill, 2015 (Minister of

Finance, 2015)

Legislative profile to provide for the imposition of a tax on the carbon dioxide (CO2) equivalent of greenhouse gas emissions; and to provide for matters connected therewith. The tax puts a price on carbon by obligating the polluter to internalise the external costs of emitting carbon.

• A proposed tax design that is neutral on the electricity price and revenue neutral from a macro-economic perspective

N/A

Source: Policy Documents and (Nhamo, et al., 2014)

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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

Heavy industry sector

Production and capacity utilisation data* Market data (exports / imports / local market)

Level of aggregation SIC code aggregation

Does data substantially represent heavy industry sector identified?



Mining

Coal Mining of coal and ignite SIC 210 Yes Mining of coal and ignite SIC 210 Yes

Precious metals (PGMs and Gold)

Platinum group metals, Gold and uranium

PGMs = SIC 2424, Gold and uranium = SIC

230

Yes

Mining of gold and uranium or, mining of metal ores

SIC 23, 24 Yes, in aggregate Chromite Chrome SIC 2421 Yes

Iron Ore Mining of iron ore SIC 241 Yes

Manganese Manganese SIC 2423 Yes

Vanadium Other metal ore mining, except gold and uranium

SIC 2429 No

Chemicals

Manufacture of basic chemicals SIC 334 Yes Manufacture of chemical basic chemicals, Processing of nuclear fuel

SIC 333, 334 No / not clear

Manufacture of other chemical products

SIC 335 Yes

Manufacture of other chemical products, Manufacture of man-made fibres

SIC 335, 336 Yes / likely

63 The 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.

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Heavy industry sector

Production and capacity utilisation data* Market data (exports / imports / local market)





Petroleum

Refining Manufacture of coke oven products, Petroleum refineries/synthesisers, Processing of nuclear fuel

SIC 331, 332, 333

Yes likely, in aggregate

Manufacture of coke oven products, Petroleum

refineries/synthesisers SIC 331, 332 Yes, in aggregate CTL

GTL

Cement

Manufacture of non-metallic mineral products (includes ceramic, clay, cement, stone and related articles, as well other non-metallic products)

SIC 342 No / not clear

Manufacture of non-metallic mineral products (includes ceramic, clay, cement, stone and related articles, as well other non-metallic products)


Iron and steel Manufacture of basic iron and steel (includes ferrous alloys)

SIC 351

Yes Manufacture of basic iron and steel (includes ferrous alloys), Casting of metals

SIC 351, 353

Yes, likely

Ferrous alloys

No No

Non-ferrous metals

Aluminium

Manufacture of basis precious and non-ferrous metals (includes precious metals, aluminium and other non-ferrous metals)


Manufacture of basic precious and non-ferrous metals (includes precious metals, aluminium and other non-ferrous metals)


Glass Manufacture of glass and glass products

SIC 341 Yes Manufacture of glass and glass products

SIC 341 Yes

Pulp and paper Manufacture of paper and paper products

SIC 323 Yes Manufacture of paper and paper products

SIC 323 Yes

* Capacity utilisation data is only available for the manufacturing sector.

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APPENDIX 3 DESCRIPTION OF LOW CARBON INVESTMENT OPTIONS

Table 57: Description of options for Aluminium

Mitigation measures Description

Energy efficiency

Best process selection for primary aluminium smelting

To minimise energy consumption and emissions, include computer control of the electrolysis process based on active cell databases and monitoring of cell operating parameters to 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


For example, compressors, pumps and fans


For example, lighting, refrigeration, compressed air

Lower electrolysis temperature

Currently, electrolysis is performed at 1233 K (melting point of Aluminium is 933 K). As a result, the temperature of electrolysis can be reduced to closer to the melting point of aluminium

Application of a dynamic AC magnetic field

A minimum distance is required between the anode and the cathode in order to avoid short-circuiting. However, as the distance increases the resistance increase resulting in an increase in electricity use. The use of a dynamic AC magnetic field allows for a smaller separation distances and as a result lowers electricity use.


Convert existing technology to PFPB technology

Replace Centre Worked Prebake (CWPB) technology with Point feed Prebake (PFPB) technology. In the prebake cells, the pots use multiple nodes that are formed and baked prior 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 cathodes

Wetted drained cathodes, of titanium diboride, allow for molten aluminium to be continually 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.


Switch to secondary production and increase recycling

Switch production pathway from primary to secondary. Secondary aluminium production using recycled scrap raw material requires significantly less energy compared to primary aluminium 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.


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Clean on-site power generation

Implement onsite clean energy generation (e.g. PV, hydro, wind etc.)

Table 58: Description of options for Cement


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 cement products

Reduction of clinker content of cement products by adding fillers and additions, (e.g. sand, slag, limestone, fly ash and pozzolana, in the grinding step).


Includes power planning and load shifting


For example compressors, pumps and fans

Energy-efficient utility systems For example lighting, refrigeration, compressed air


Implement kiln systems with multistage cyclone preheaters and precalciner

Implementation of energy efficiency measures including reduction of thermal energy use, selection of energy optimised process kiln systems with multistage cyclone 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


Waste heat recovery from kilns and coolers/cogeneration

Energy recovery from kilns and coolers for cogeneration (e.g. Conventional steam 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

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CCS - back-end chemical absorption

Carbon capture and storage (CCS) could enable up to 95% reduction of CO2 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


Example based on the revamp of a 20 year old reduced primary reforming 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.


Monitoring of key performance parameters creates the basis for improvement 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 controls and variable speed drives (e.g. compressors)



Energy efficient utility systems Energy efficient utility systems (e.g. lighting, refrigeration, compressed air)


Increase process integration and improved heat systems (including heat 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.

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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 processes with natural gas-fired steam reforming production

Implement per tonne of ammonia the energy requirement for coal based plants is significantly higher than that for natural gas-fired facilities. A coal-based unit 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.


The generation of hydrogen is one of the largest energy-consuming steps in 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 plants process emissions

In the chemical and petrochemical industry, processes such as ethylene, 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 plants

N2O emissions removal efficiency of 98-99% can be achieved using various measures (e.g. Non-selective catalytic reduction (NSCR), Combined NOx and N2O abatement reactor and N2O decomposition in the oxidation reactor etc.).


Tail-gas energy recovery for combined heat and power plant (CHP) and minimise flaring [Carbon black plant]

Use high efficiency combined heat and power (CHP) to supply power and heat for production. The recovery of the energy generated by tail-gas could be of great benefit to the carbon black plant and would enable it to make use of the energy 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.



Combined heat and power (CHP) Combined heat and power (CHP)

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Table 60: Description of options for Coal


Energy efficiency


The mining industry has identified many energy savings in diesel using activities. These include payload management, managing intersections, gradients and distances travelled through better mine planning and idle time management

Process, demand and energy management system

Monitoring - Real time monitoring and display of demand loads and 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


Replace old, inefficient electric motors (e.g. circuits, grinding, transport, compressors, pumps and fans etc.) with energy efficient motors.


Optimise existing electric motor system control and install variable 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 5% biodiesel (B5) for transport and handling equipment/open pit mobile machinery


Use of 50% biodiesel (B50) for transport and handling equipment/ open pit mobile machinery




Coal mine methane recovery and utilisation for power and/or heat generation

Recovery and utilise medium concentrations of coal mine methane (that would normally be vented) and utilise for power and/or heat generation. Due to lower quantities and concentrations of methane in South Africa, application may be limited.



GHG Emission Abatement



Table 61: Description of options for Coal to Liquid


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


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Energy efficient boiler systems and kilns, including replacement of old boilers with new.

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 coal to natural gas

Converting feedstock from coal to natural gas can reduce emissions by 75%. 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.


Increase onsite gas-fired power generation - using gas turbines

Installation of most efficient gas turbine power generation equipment onsite to reduce 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 generation - using internal combustion engines

Installation of most efficient gas turbine power generation equipment onsite to reduce imports of carbon intensive grid electricity. Reference project is the installation of 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 generation

Recovery of waste process heat and utilise for onsite electric power 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 utilisation

Recovery of waste process gas (e.g. rectisol methane) and utilise for thermal/heat demand on site.

CCS

CCS - CO2 capture and compression

CO2 capture and compression is the 1st stage of Carbon Capture and Storage (CCS). 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 existing plants (storage onshore)

CO2 capture and compression is the 1st stage of Carbon Capture and Storage (CCS). 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$/tCO2 (IEA) [5], including Capex, compression, transport and storage. CTL/GTL cost could be a low as 11 US$/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).

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CCS - process emissions from existing plants (storage offshore)

As above. Except captured CO2 transported and stored offshore so costs increases, but capacity not limited as much.

CCS - process emissions from new plants

As CCS - existing facilities (storage onshore) above. Except captured CO2 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 production techniques

Implementing best available production techniques including improved raw material 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).




Including for example, compressors, pumps and fans.

Energy efficient utility systems Energy efficient utility systems




Replace submerged arc furnace semi-closed with closed type

Closed submerged arc furnace (SAF) can use 20% less over energy (including 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.


Waste gas recovery and power generation - CO from closed furnace

Recovery of carbon monoxide (CO) in waste gas from closed furnaces for the utilisation of power generation (70-90% CO). Electricity can be used in the 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-closed furnace - Rankine Cycle

Recovery of waste process heat primarily from semi-closed furnace flue gas for the 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-closed furnace - Organic Rankine Cycle

Recovery of waste process heat primarily from semi-closed furnace flue gas for the 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)

On-site clean power generation Implement onsite clean energy generation (e.g. PV, hydro, wind etc.)

Fuel switch

Use biocarbon reductants instead of coal/coke

Use biocarbon reductants (e.g. charcoal and wood) instead of hydrocarbon reductants (e.g. coke and coal) within the smelting process.

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Table 63: Description of options for Glass


Energy efficiency

More Efficient Forehearths

Performance of the forehearth is rated by the range of pull rates and gob temperatures within 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 furnaces

Instead of firing horizontally, these furnaces direct the flames almost vertically down onto the 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-heating

Batch and cullet are normally introduced cold to the furnace. By using the residual heat from the 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 furnaces

Regenerative furnaces have two chambers, each containing refractory material, called the 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 .

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Forhearths process control

The fact that physical properties of the glass as a function of temperature makes forehearth 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 process control

Computuerized process control systems are applied in diverse range of industries in order to 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 drives on combustion air fans and compressor motors

Adjustable speed drives (ASDs) offer an efficient and effective demand response strategy, as compared to other approaches. For situations where furnace air demand show variations over time while cooling air and stack blowers run continuously, the the use of Adjustable Speed Drives (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 Combustion for Glass Production

Oscillating combustion is a new technology, which forces the oscillation of the burner fuel to create successive, fuel-rich and fuel-lean zones within the flame. This increases heat transfer by 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.


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

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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 gas recovery

Energy recovery from the Basic Oxygen Furnace (BOF) gas and waste heat. In Basic Oxygen 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 recovery turbine

Energy recovery from blast furnace top gas pressure (TRT)

Top gas-recycling blast furnace (with CCS)

Top gas-recycling blast furnace (TGR-BF) - energy/carbon reductants recovery/recycling. CO 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.


As above


As above


For example, compressors, pumps and fans


As above


For example, lighting, refrigeration, compressed air


As above


Electric arc furnace (EAF) and secondary production route

Increasing production of steel from scrap in Electric Arc Furnaces (EAF)


State-of-the-art power plant

Power plants can play an important role in saving energy and mitigation in integrated 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 generation


Carbon capture and storage (CCS)

CCS - Blast Furnace (post-combustion)

CCS is a key element for the decarbonisation of the Iron & Steel industry. In an integrated steel 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

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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 plant (with CCS)

CCS is a key element for the decarbonisation of the Iron & Steel industry. In an integrated steel 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.


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 alternative to traditional furnaces

Electrons, provided by electricity, are used as reducing agents. Iron ore is placed in a solution and charged with an electric current. This positively charges the iron ions, which are then 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 blast furnaces

Using waste plastics in the place of coal decreases the blast furnace coke and energy 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 blast furnaces

Injecting natural gas reduces the coke production. Natural gas also enriches the furnace with hydrogen, a reducing agent. Hydrogroen reduction does not result in CO2 as a product, thus reducing CO2 emissions.

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Table 65: Description of options for Liquid Fuels


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 gas from the FCC regenerator/Improve energy efficiency of catalytic cracking

Heat recovery from the regenerator flue gas is conducted in a waste heat boiler or in a CO boiler. Heat recovery from the reactor vapour is 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 variable speed drives (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

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recovery compressor system to recover flare gas to the fuel gas system.


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


Energy efficiency


The mining industry has identified many energy savings in diesel using activities. These include: payload management managing intersections, gradients and distances travelled through better mine planning idle time management




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.



Fuel switch








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)

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Table 67: Description of options for Paper and Pulp


Energy efficiency

Energy efficient boiler systems and kilns and Improved heat systems

(e.g. preheating of air and fuel charged to boilers, reduced heat lossess, improved heat exchanger efficiencies, Improved process integration etc)

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 Mechanical Pulping (TMP)

New energy efficient Thermo-Mechanical Pulping (TMP) processes using high efficiency multi-stage refining

Energy efficient electric motors, improved controls and variable speed drives

(e.g. compressors, pumps and fans)


Energy-efficient utility systems (e.g. lighting, refrigeration, compressed air)


Fuel switch

Convert fuel from coal to biomass/residual wood waste

Avoid emissions from fossil fuels by utilising biomass wastes as fuel in pulp and paper production.


Application of Co-generation of Heat and Power (CHP)

"Paper industry is a high energy consuming industry. Increased speed of paper 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


Energy efficiency


The mining industry has identified many energy savings in diesel using activities. These include: payload management managing intersections, gradients and distances travelled through better mine planning idle time management





Replace old, inefficient electric motors (e.g. circuits, grinding, transport, compressors, pumps and fans etc.) with energy efficient motors.

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Fuel switch










Cogeneration Cogeneration can occur through a number of processes (e.g. Conventional steam cycle process and Organic Rankine Cycle (ORC) process)

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APPENDIX 4 SUMMARY LITERATURE REVIEW

Reference Barriers to low carbon investment / funding Recommendations

Cloete et al., 2016

General

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 *Ability to wheel power is limited (and process unclear) *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.

Cloete et al., 2016

General 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

Insurance products could reduce bankability requirements by removing some counterpart risk and concessionary finance could reduce payback periods.

Cloete et al., 2016

General

The processes and documentation required to access the funding can be quite onerous. This is even more some when financial institutions disburse concessional funding from third parties since two sets of requirements then need to be met.

Helping project developers understand how to design projects to maximise sustainable development outcomes and thereby make it easier to unlock ‘soft’ finance could be useful.

Cloete et al., 2016

General

Credibility of the off-taker is an issue given long term nature of LED projects (even for seemingly well capitalised private sector entities). Long-term nature of projects exposes funders to general market risk in the relevant sectors.

* Wheeling power to more than one off-taker * Use of risk mitigation or sharing measures like credit guarantees

Cloete et al., 2016

General

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.

* Soft funding in the form of grants and/or low-interest loans * Project development and preparation support (e.g. assistance with the feasibility and pre-bankable feasibility costs) * Simplified regulatory regimes and environmental authorisations

Cloete et al., 2016

General High cost of implementing Public-Private-Partnerships (PPPs) means that projects below R1bn is unlikely

Cloete et al., 2016

General Lack of information sharing between lenders about opportunities and lack of willingness of co-fund projects

Cloete et al., 2016

General There is a lack of information relating to technologies where the local application is less mature like biomass, biogas and co-generation that can hamper project development.

Collaboration between number of local initiatives or institutions gathering market information on new LED applications in South Africa.

Cloete et al., 2016

General Cheaper to landfill waste than to implement waste-to-energy projects

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Cloete et al., 2016

General Power grids in need of repairs, upgrades and maintenance (and many municipalities lack the human and financial resources to do so)

Cloete et al., 2016

General Regulatory barriers related to electricity sales (see above)

Cloete et al., 2016

Solar Cost barriers: solar has only recently become cost competitive with grid electricity in SA, and many companies can earn higher returns investing in their primary business.

Cloete et al., 2016

Solar Payback for ground-mounted PV is 7-8 years.

Cloete et al., 2016

Solar Solar panels expensive with high administration costs

Cloete et al., 2016

Solar Theft of solar panels

Cloete et al., 2016

Solar

Few suppliers and installers of PV systems with long track records. This makes it difficult to judge the quality of PV systems, and acts as a barrier to all but the most informed purchasers of solar PV systems

The market needs a number of big players with strong balance sheets and proven track records to provide credibility to both the domestic and corporate solar PV markets

Cloete et al., 2016

General Many municipalities fear that allowing embedded generation will jeopardise revenues from electricity sales that are used to cross-subsidise a number of other municipal services

Cloete et al., 2016

Wind Large wind farms can generate electricity at around 50c/kWh, but smaller wind farms (5MW or less) are less competitive at around R1.10/kWh.

Cloete et al., 2016

Wind Lengthy and challenging regulatory process (15-27 different approvals)

Cloete et al., 2016

Biomass Procuring feedstock of a consistent volume, quality and price is a significant barrier.

Cloete et al., 2016

Biomass High regulatory requirements

Cloete et al., 2016

Biomass Given the large feedstock requirements, very few biomass off-takers that funders would have confidence in.

Cloete et al., 2016

Biomass Most significant barrier is access to waste streams

Cloete et al., 2016

Waste to Energy

High regulatory barriers e.g EIA's, MFMA constraints and government approvals, zoning and land access, air pollution controls

Cloete et al., 2016

Waste to Energy

Generally administrative and complex processes

Cloete et al., 2016

Waste to Energy

Price barriers - waste disposal fee too low to incentivise access to waste

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Cloete et al., 2016

Waste to Energy

Price of recyclables is too low to stimulate demand and support materials recovery facilities which would make more waste available for waste to energy projects

Cloete et al., 2016

Waste to Energy

challenge in securing grid access and offtake agreements

Cloete et al., 2016

Waste to Energy

Lack of awareness of the benefits of biogas technologies

Cloete et al., 2016

Waste to Energy

Few EPCs have large enough balance sheets to provide banks with performance guarantees for larger projects

Cloete et al., 2016

Waste to Energy

Lack of dedicated finance for promising new technologies like biogas

Cloete et al., 2016

Waste to Energy

Some Investors do not consider pyrolysis and gasification to be sufficiently mature technologies in the South African context to warrant the investment risk

Support from institutions such as the Technology Innovation Agency, IDC and DTI.

Cloete et al., 2016

Waste to Energy

Biogas projects not yet financially viable without large amounts of equity

Cloete et al., 2016

Hydropower Water stressed country

Cloete et al., 2016

Hydropower Wheeling arrangements and securing off-takes are problematic

Cloete et al., 2016

Hydropower Regulatory barriers E.g Water Use Licences

Cloete et al., 2016

Hydropower Payback for micro-hydro plants within bulk water infrastructure high (14-15 years)

Cloete et al., 2016

Co-generation

Difficult to obtain finance given expensive electricity, high upfront investment, and long payback periods

Cloete et al., 2016

Co-generation

Little early stage funding available for co-gen projects. This is longest part of project cycle and costs are typically carried by project developers.

Cloete et al., 2016

Co-generation

Off-taker risk is significant issues given high upfront capital requirements, long financing period (around 12 years) and significant market risk to heat or gas supply.

Cloete et al., 2016

Co-generation

Electricity generated is relatively expensive, and appears less competitive than other technologies (unless co-gen is very well integrated with existing processes)

Cloete et al., 2016

Co-generation

Many projects linked to the mining and beneficiation sector, which is subject to commodity cycles which bring market risk (co-gen only operates while plant operates as it is source of heat and gas)

Cloete et al., 2016

Co-generation

Complications around wheeling mean that co-gen projects are typically captive projects unless they were designed to feed into the Eskom grid - which concentrates risk.

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Cloete et al., 2016

Co-generation

Co-gen projects are very capital intensive and thus less well suited for incentives like 12L that reward energy savings once the investment has been made

Nicholls et al. 2015

General Regulatory barriers to projects such as the framework for feeding into the grid, net metering, wheeling and lack of time-of-use tariffs.

The issue of regulatory certainty and clear long-term feed-in tariffs are critical to enabling large-scale uptake of smart grids and distributed generation


General Difficulty in measuring revenue and reduction in costs.

* A unified understanding of the problem and price certainty allowing for alignment of policy and intention whereby the full suite of financial instruments can be applied, e.g REIPPP Programme. * Collective intent and/or provide a mechanism to generate cash flow or price certainty within the project policy framework


General There is a threshold for some types of projects where policy measures cannot create a price proportional to the value of the underlying asset.

Policy must be used as an overarching protection mechanism providing specific rules.


Transport Shifts to LPG or electric vehicles are hindered in the context of limited supply of gas and energy

Providing price disincentives (higher fuel taxes and large passenger vehicle taxes) and incentives (company or government department mobility allowances rather than car allowances, Spatial solutions like no drive zones and efficiency solutions like common ticketing across transport modes


Transport Prejudices against public transport use, making public transport more accessible, more hygienic, more secure and easier to use

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 code and expectations on employees to carry large amounts of 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.


General Legislative challenges and uncertainty with generating and wheeling E.g mine dumps

More multi-stakeholder sessions would be helpful and should include DMR and DOE


General Regulatory uncertainty with smart grids. E.g long term feed-in tariffs were critical to enabling large scale uptake of smart grids and distributed generation. s.

Using policy to provide price certainty, driving certainty and scalability through clear regulation, policy and feed-in tariffs; and driving commercialisation through evolving business models in the electricity sector. Finalise NERSA Consultation Paper: Small-Scale Embedded Generation: Regulatory Rules.


General

In addition to this, it was recognised that the need to ensure that the grid infrastructure is capable of bi-directional, volatile flows of electricity, which is essential for driving a successful roll-out of smart grid


General Price of electricity from renewable energy sources is still higher than Eskom’s prices for municipalities.

National government needs to subsidise the difference in price, which would be much smaller than the subsidy provided to the REIPPP

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General Stakeholders did however report challenges relating to policy coherence and structural barriers within the financial service sector.

In the case of South Africa our planning framework (the NDPs implementation through the Medium Term Strategic Framework and supported by the 9-point plan) is a significant aid to project development and economic transition


General In South Africa, the primary concern is overcoming structural barriers in the economy in general and specifically issues in the financial services sector.

This type of problem is best solved through clever policy developed in tandem with the financial services sector and other stakeholders.


General Projects required to grow using only grant and concessional debt which inhibits the scale and risk tolerance of project and project classes.

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 guidance on how international finance could be deployed in support of green economy or climate transition objectives. Using 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.


General Low credit ratings and investor confidence

CICERO, 2016

General Funding is often a barrier preventing climate measures. Grants is a financial instrument available to remove this barrier

CICERO, 2016

General Political risk can be a deterrent to investments in particular countries

Guarantees are instruments available to mitigate this barrier.

CICERO, 2016

General Renewable energy technologies are capital-intensive technologies

CICERO, 2016

General Low power grid capacity Interest rate subsidy and technical support

The Green House, 2016

General Availability to feed electricity to the grid


General Presence of common electricity tarrifs


General Exchange rates and instability of the South African Rand can alter project viability


General Low labour productivity increase education and capacity


General Length of regulatory processes e.g land lease rights, obtaining generating licenses or exemptions

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General Labelling projects as LED projects, and overanalysing their possible contribution, operation, performance and support needs delay projects unnecessarily or even prevent implementation

They indicated that projects should rather be supported in the same manner as any other technology-based projects. Key to this component of this support would be facilitation of access to cash flow (rather than guarantees, capacity building etc


General Analyses and needs assessments related to supporting LED projects are commissioned repeatedly


General Access to cash flow to fund projects.


General LED projects require longer payback periods and are higher risk.


General

Buy in for co-gen plants is only possible if the project offers savings over the long term in order to justify the up-front costs and the risk. This is seldom possible over the short term, with projects typically requiring at least a 10- to 15-year commitment


General

In the case of distributed generation or micro-grids for instance the minimum is 10 years, requiring some sense that the politics and macro-economics of the country will be stable over that time. Given the risks, projects often do no proceed without government (or development banks) underwriting the projects


General Administrative burden associated with applications for permits, licenses and funding. Expensive and time consuming

Availability of a set of guidelines and forms, which would be accepted across institutions, would help to streamline the process significantly


General Lack of technical capacity in the municipalities Municipalities need capacity built in relation to the ability to stipulate and assess the technical requirements of tenders


General municipalities frequently do not have the technical knowhow or capacity to assess the viability of unsolicited approaches from project developers


General

Lack of technical knowhow affects the type of procurement undertaken - without being informed by technical expertise the terms of tenders can often be technically unfeasible, acting as a disincentive for project developers


General Project developers also identified slow turnaround times in relation to decisions on tenders as problematic and a disincentive to work with municipalities

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General

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 project will be liable or eligible until after the application process has been completed (such as for a reduction in electricity tariffs), 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


General One of the key requirements for financiers to fund a project is that it be bankable, with returns commensurate with the project risk.


General Projects that are too small battle to get funding as the legal and regulatory cost barriers are too high

This points to the potential opportunity for seeking funding mechanisms for baskets of similar projects, and streamlining of regulatory and application procedures – so as to help overcome these hurdles


General

Where projects are linked to or are affected by commodity cycles (such as co-generation being linked to primary minerals or biofuels competing against low fossil fuel prices), this adds an additional level of uncertainty to the project, thus resulting in additional risk to investors


General

Smaller EPC companies often do not have the balance sheets to be able to provide guarantees for project finance. As such, large EPC contractors, with balance sheets of upwards of approximately R2 billion are often approached instead. Such companies, however, are more expensive than smaller companies which in turn renders the project potentially uncompetitive


Solar High costs of batteries and storage


Solar

Continued reluctance on the part of municipalities to support solar PV due to misperceptions about safety & misconceptions about the technology’s performance and requirements (e.g. not all PV needs batteries)


Solar High costs of meters and costs associated with required installation and sign off add significant costs, particularly for small scale (household) installations


Solar Some municipal utilities (such as City Power) are viewed to actively discourage embedded generation

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Solar Lack of knowledge and experience in relation to net metering - Municipalities are ill-equipped to manage the complications that would arise


Solar Lack of strong supportive signal from government creates uncertainty about future of sector and hampers future growth and planning


Solar

High costs of panels - even locally produced solar panels are priced in dollars due to the contribution of imported inputs to their manufacture, and the fact that the panels can be sold on overseas markets


Solar The multitude of electricity tariffs across the country raises administrative costs for developers - which are then passed on the clients


Solar The multitude of electricity tariffs also means that the business case must be assessed individually for each installation


Solar

Going to market to finance PV systems is challenging as there is no underlying asset that can resold to recoup loan in the event of losses, there is not considered to be a viable second-hand market, which is in part due to improvements in the technology over time


Solar Theft is a big issue in both rural and urban areas


Biofuels Low international oil price renders biofuel prohibitively expensive


Biofuels SA’s drought renders the production of fuel from food sources


Biofuels Lack of progress on Biofuels Regulatory Framework by government means the industry is effectively in limbo


Biofuels

The 2005 Biofuels Industrial Strategy requires ethanol to be manufactured from new lands and to create new jobs (even though bio-ethanol is currently produced and would only need to be rerouted)


Biofuels DOE needs to allow for testing of small amounts of ethanol but so far Ethanol blending regulations have only recently been gazetted

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Biofuels SARS will only go ahead (and classify ethanol) if the Framework regulations are published, or if NT waives the levy


Biofuels As ethanol not yet classified as a fuel & no fuel tax is payable on that portion, the government only gets taxes on the taxable part of a blended fuels - disincentive


RE-CNG Insufficient awareness of the opportunity which leads to insufficient demand to establish extensive networks of infrastructure for gas distribution


RE-CNG Slow government decision-making leads to long lead times for CNG projects (in both stationary and mobile applications) thus adding to risk & cost


RE-CNG

There is a need to consider supply and demand (including roll-out of vehicles) in an integrated fashion. It is not possible to consider only one component of the system in isolation, which is what is happening at the municipal level at present


RE-CNG The issue of taxation of CNG as a fuel still hasn’t been sorted by Treasury


Waste to Energy

Incineration needs large waste volumes to make it feasible


Waste to Energy

Permitting and air pollution controls are a large (sometimes prohibitive) cost


Waste to Energy

Investors do not consider pyrolysis and gasification to be sufficiently mature technologies in the SA context to risk the investment


Waste to Energy

Municipalities have a cradle-to-grave responsibility for managing municipal solid waste so are reluctant to outsource processing if there’s a risk the technology might not work or the provider could go bankrupt


Waste to Energy

Very low landfill gate (tipping) fees provide little incentive for pursuing alternative waste management options


Waste to Energy

Lack of technical or legal capacity


Co-generation

Electricity generated is expensive, and cannot compete with other technologies

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Co-generation

The large up-front costs make project development on co-gen plants untenable if the developer cannot convince the host to share in the cost of the preparatory phases


Co-generation

Opportunities are often linked to utilisation of waste heat on smelters, and so when a smelter shuts down for any reason the co-generation plant ceases to generate. This risk to project developers may be mitigated through entering take-or-pay contracts, such as that which is in place at Anglo Platinum/Eternity Power.


Co-generation

The biggest technical challenge is cleaning the gas prior to generation, although this is one that can be overcome


Co-generation

Most viable potential projects are related to the mining industry. This necessitates working with DMR which potentially problematic. Also challenging is obtaining the S79 exemption to deviate from mining safety requirements (which are onerous and not generally applicable to safety on a co-gen plant)


Co-generation

Getting finance is difficult


Co-generation

Commodity fluctuations E.g ferrochrome industry

Nakhooda et al 2016

General Transaction costs of small-scale projects

Strengthened focus on building institutional capacity to conceptualise climate compatible development projects and manage climate finance well. It will also require investments in good governance of climate finance. Good governance in turn 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 et al 2016

General Poor investment climate

Nakhooda et al 2016

General Weak capacity of government institutions to manage finance, political instability and governance problems

DOE, 2015 Gas to Electricity

Low electricity prices


Extensive and costly monitoring and verification requirements to qualify for carbon credits


Length regulatory process e.g EIAs

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DOE, 2015 Biogas to Energy

Length regulatory process e.g CDM

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

DOE, 2015 Solar Prohibitive initial system costs, low levels of awareness about SWH performance and durability and delays in installation associated with the greater complexity of SWH sizing and location

Switch to Solar Programme: The initiative offered a database of reputable SWH manufacturers and installers, post-installation inspections by certified plumbers and, most importantly, financing. The programme covered the full initial cost of supply and installation, processed any incentive claims on behalf of the homeowner and then allowed the consumer to repay the balance over a six-year period.

DOE, 2015 Solar

The future generation projects are determined by a competitive bidding process, which is assessed on an individual project basis. Economies of scale are therefore difficult to obtain and to integrate with network plans

Green Cape, 2016

General During the last quarter of 2015, the board of Eskom issued a letter indicating that the utility would halt the issuance of budget quote letters

DEA, 2016 General Downturn and decreases in commodity prices, which is reportedly encouraging industry and mining to focus on increasing throughput.

DEA, 2016 General Market failures, such as energy service companies that do not 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 General

Enforcement is ensuring that objectives, processes, and procedures are well defined and consistently followed where measures are obligatory.

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GGBP, 2014

General Investment risks

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 to encourage green growth; and iii) tailored application of financial 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, 2014

General Insufficient rates of return for some green technologies and practices

GGBP, 2014

General Competing subsidies and policies

GGBP, 2014

General Insufficient capacity,

GGBP, 2014

General Information gaps, and regulatory and institutional barriers.

GGBP, 2014

General Vested interests of those negatively impacted by energy price increases E.g investors in emission intensive sectors,

GGBP, 2014

General Higher costs of green technologies

GGBP, 2014

General Technology development risks

GGBP, 2014

General Distortionary subsidies

GGBP, 2014

General Lack of liquid debt and equity finance Improving return on investment, including boosting returns and limiting costs and mitigating risks faced over the lifetime of the project.

GGBP, 2014

General Information gaps and asymmetries

GGBP, 2014

General Skills gaps/ limited technical expertise

UNEP, 2015 General Financing costly or unavailable

AFRICEGE, 2014

General High investment costs

Support could also be directed towards other renewable energy projects that require less catalytic funding but can have a large impact e.g. rural off grid and mini grid energy and the development of biogas and biofuels.

AFRICEGE, 2014

General

Funds are not well distributed along the project value chain, creating the ‘valley of death’ for projects that don’t qualify for the financial mechanisms such as grants, but have also not matured enough to access equity funds

Green Fund could play an important catalytic role to unlock some of these barriers, but at the same time invest in high impact projects that could help to drive the transition to a green economy and create jobs

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Green Cape, 2016a

Solar High financial costs

Green Cape, 2016a

Solar Lack of policy

Green Cape, 2016a

Solar Unregulated tariff structures

Green Cape 2016b

Waste to Energy

Lack of economic viability

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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

Institutional investors / Asset managers

• RMB

• PIC

• Coronation Asset Managers

• Atlantic Asset Management

• Adlevo Capital

• Old Mutual/OMIGSA

• Red Cap Investments

• Zimele (Anglo American’s Enterprise Development)

• Mergence Capital

• Vantage Capital

• Investec

Banks and credit providers:

• ABSA

• Deutsche Bank

• FNB

• Nedbank

• Standard Bank

• Sasfin

• Greenfin

Bonds, funds and other funding pools

• 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

• Regional Bulk Infrastructure Grant

• 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)

PE/Venture Capital companies and

advisors

• Adlevo Capital

• Business Partners

• Mzansi Gold

• Inspired Evolution (evolution one fund)

• Futuregrowth

• Inspired Evolution

• RisCura

• Harbour Energy

• Swedfund International AB

• Abax Investments

• Angel Hub

• Angel Investment Network

• Bioventures

• Brait Capital

• Citadel Capital

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• 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

Non Traditional Foundation Donor 7

• Clinton Climate Initiative (CCI),

• Omidyar Network,

• B&M Gates Foundation,

• 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)

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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)

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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)

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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.

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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 Industry

Black Industrialists Scheme Y

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 Programme (MCEP)

Y

Manufacturing Investment Programme (MIP) Y

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)

Y

Support Programme for Industrial Innovation (SPII) Y

Support under the Special Economic Zones Act Y

Technology and Human Resource for Industry Programme (THRIP)

Y

CDM Carbon Credits from CDM or any other source (including voluntary markets)

Y

SANEDI Energy Efficiency Tax Incentive (Section 12 L of Income Tax Act)

Y

Eskom Eskom Demand Side Management (DSM) funding [when it was available]

Y

South African Revenue Service

Tax incentive 12B: Renewable Energy (accelerated depreciation)

Y

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Tax incentive 12K: CDM Y

Tax incentive 12U: Expenditure related to renewable energy projects

SEDA Seda Technology Programme (STP) Y

Department of Science and Technology

Tax incentive 11D Tax incentive Scientific and Technological R&D

Y

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).

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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.

http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-bonds/executive-committee/

http://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/cb_home/news/feature_ghgaccounting_dec2012

http://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/cb_home/news/feature_ghgaccounting_dec2012

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Table 71: DFIs, donors and other public sector funds and funding pool institutions

Institution Type Institution Names

Development Agency/ DFIs and support agencies

• 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)

• Mpumalanga Economic Development Agency (MEGA)

• North West Development Corporation (NWDC)

• 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)

Donors and international DFIs

• 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)

• Department for International Development Cooperation

• 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)

185


• 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)

Bonds, funds and other funding pools

• 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)

• National Development Agency (NDA) Fund

• 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)

186


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. wages)



Metal ores

Other mining

Paper Coke /

petroleum

Nuclear fuel / basic

chemicals

Other chemical

s Glass

Non-metallic minerals

Iron and steel

Precious metals

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 (incl. distribution)

3.15% 2.44% 6.82% 6.73% 2.79% 0.83% 11.11% 4.64% 6.68% 2.71% 6.33% 6.98%

% of total output Mining Manufacturing


Metal ores

Other mining

Paper Coke /

petroleum

Nuclear fuel / basic

chemicals

Other chemical

s Glass

Non-metallic minerals

Iron and steel

Precious metals

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 (incl. distribution)

1.83% 2.21% 4.97% 4.72% 2.51% 0.65% 10.50% 4.56% 6.62% 2.32% 6.17% 6.62%

187


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

Company Scope 1 emission intensity (kg CO2e/

tonne coal) Scope 2 emission intensity (kg CO2e/

tonne coal)

Anglo American – South Africa

12 16

Anglo American – Canada/ Australia

168 29

Exxaro 6 14

Source: (Exxaro, 2016; Anglo American, 2015b; Anglo American, 2015a)

188


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

Company Scope 1 emission intensity (tonne

CO2e/ kg metal) Scope 2 emission intensity (tonne

CO2e/ kg metal)

Gold

Gold fields 1.1 79.4

Sibanye 2 (excluding fugitive emissions)

15.8 (including fugitive emissions) 90.8

Platinum

Anglo Platinum 7.6 72.3

Impala Platinum 4.3 36.9

Northam Platinum - Zondereinde

3.2 75.8

Northam Platinum - Booysendal

2.2 41.2

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

Company Scope 1 emission intensity (kg

CO2e/ tonne product) Scope 2 emission intensity (kg CO2e/

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)

189


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

Company Scope 1 emission intensity (kg CO2e/

tonne crude input) Scope 2 emission intensity (kg CO2e/

tonne crude input)

SAPIA (whole industry

119 43

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.

190


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 (tonnes CO2e/ tonne steel)

Scope 2 emission intensity (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.

191


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


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

Process Scope 1 fuel emission intensity (tonnes CO2e/

tonne ferroalloy)

Scope 2 emission intensity (tonnes CO2e/

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

Product

Benchmark for scope 1 emissions

(tonnes CO2e/ tonnes ferroalloy)

Benchmark for scope 2 emissions 1

(tonnes CO2e/ tonne ferroalloy)

Indicative benchmark values (tonnes CO2e/ tonne

ferroalloy)

Chromium alloys 1.3 1.95 - 3.25 3.25 – 4.55

Manganese alloys (7% C)

1.3 1.95 - 3.25 3.25 – 4.55

Manganese alloys (1% C)

1.5 2.25 – 3.75 3.75-5.25

Silicon alloys (assume 65% Si)

1.5 8.2 9.7

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)


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.

192


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).


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.

193


Table 81: Summary of low carbon investment options

Sector

Max payback period (years)

Number of large options

Payback period (years) Cost (R/tCO2e) Number of Small options

<3 years 3-6 years 6-10 years > 10 years Unclear <40 40-80 80-120 120-160

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


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.

194


Figure 60 Distribution of financeable low carbon investment options by size


0

2

4

6

8

10

12A

lum

iniu

m

Cem

ent

Chem

icals

- C

arb

on B

lack

Ch

em

ica

ls -

Nitric A

cid

Ch

em

ica

ls -

Po

lym

ers

Co

al

CT

L/G

TL

Fe

rro

allo

ys

Gla

ss

Gold

& P

latinum

Iron a

nd S

teel

Iron O

re

Liq

uid

fue

ls

Paper

and p

ulp

Unclear (7%)

>R1,000m (14%)

R500-1,000m (5%)

R100-500m (11%)

R50-100m (10%)

<R50m (53%)

195


Table 82 Characterisation of large options (R50 million and more) not attractive for financing, by sector

Sector Not

considered realistic in SA

Widely implemented/


remaining

No gas Other and unclear

Total

Aluminium 6 2 1 9

Cement 6 2 2 10

Chemicals - Carbon Black

3 1 4

Chemicals - Nitric Acid 6 1 7

Chemicals - Polymers 3 2 5

Coal 3 1 3 7

CTL/GTL 5 1 2 2 10

Ferroalloys 3 1 4

Glass 4 2 6

Gold & Platinum 1 1 3 5

Iron and Steel 8 4 1 13

Iron Ore 3 2 5

Liquid fuels 5 2 7


Total 58 19 9 11 97


196


Table 83 Large low carbon investment options (R50 million and more) by sector and type of option66

Sector CCS


Energy efficiency

Fuel switch GHG

emissions abatement



Grand Total

Aluminium 2 2

Cement 1 1 1 3

Chemicals - Carbon Black

2 1 3

Chemicals - Nitric Acid

1 1 2

Chemicals - Polymers 1 1 2

Coal 1 1 2

CTL/GTL 1 5 6

Ferroalloys 3 1 4

Glass 1 2 3

Gold & Platinum 3 2 5

Iron and Steel 1 2 4 7

Iron Ore 1 1 2 4

Liquid fuels 2 1 3


Grand Total 1 20 22 4 2 1 1 51


66 All 57 options with an investment cost of less than R50 million related to energy efficiency. One of these options, mini hydro in the pulp and paper sector, was classified as a ‘large’ project (external finance is being considered for a project) and included in the table. All the projects in this table thus relate to investments of more than R50m (or in 7 cases the investment cost was unclear). An additional 56 options which require an investment of less than R50 million is thus not shown in the table above, but could be finance by pooling these options into larger investment programmes.

197


A 8.2 Impressions of low carbon incentives available in South Africa

The awareness, impressions and strengths and weaknesses of different of incentives can help

inform the design of future support programmes, and consequently this information gathered via the

stakeholder engagement process is included in this appendix.

Figure 61 Support programmes considered or utilised for low carbon projects

Number of stakeholders or focus groups that mentioned a support programme

0 1 2 3 4 5 6 7 8 9 10 11 12

12L

CDM

Eskom DSM

12i

DTI incentives

Export Credit Funding

MCEP

REI4PP/SPIPPPPs

12K

Capital Projects Feasibiity Programme

CIP

Eskom SWH

Grant/ concessionary funding

IDC funding

IDZ

Jobs Fund

THRIP

198


Figure 62 Support programme satisfaction score

Number of positive mentions minus number of negative mentions/recommendations for improvement

Table 84 Strengths and weaknesses of selected support programmes

Support mechanism - name

Strengths Weaknesses

12L

Incentive is sufficient to incentive action x 2 Cannot access in addition to existing mining

sector benefit

Only valuable when company is making a profit

Lack of M&V accredited suppliers

Amount on the low side

Only worth doing for large investments due to M&V costs x 4

Consultants are expensive

Rules are not clear - investment with uncertain benefit

Certificates not tradeable

Difficult to ringfence energy savings within their process

Time-consuming and resource-intensive - requires expensive systems x 3

CDM

Possibility to transfer credits to local offset market

Market weakness affects income x4

Way of offsetting project development cost M&V very expensive x2

Additional revenue stream can reduce payback

DTI incentives

Often takes longer to apply and receive

funding than project payback (18 months in example provided)

Lack of awareness of incentives

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5E

sko

m D

SM

12i

12K

CIP

Exp

ort

Cre

dit F

un

din

g

MC

EP

IDZ

RE

I4P

P/S

PIP

PP

Ps

TH

RIP

Cap

ita

l P

roje

cts

Fea

sib

iity

Pro

gra

mm

e

DT

I in

ce

ntive

s

Esko

m S

WH

Gra

nt/ c

on

ce

ssio

nary

fu

nd

ing

IDC

fu

ndin

g

Jo

bs F

und

CD

M

12L

199


Support mechanism - name

Strengths Weaknesses

Eskom

Upfront funding reduce need for company capital investment

Largely funded opex rather than capex x 2

MRV included in mechanism Lack of certainty meant it could not be

included in capital budgets done year in advance

Standardised contracting

ESCOs accessed funding

Export Credit Funding

Funding > 10 years Forex risk

General incentives/ IDC funding

Difficult for foreign service providers cannot access local support x 2

Grant/ concessionary funding

Too many strings attached

REI4PP/SPIPPPP

Long-term PPAs and can access commercial funding x2

Escalations linked to CPI creates risk when 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

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.

0 1 2 3 4 5 6 7 8 9

Environmental compliance burden (capital and capacity)*

Uncertain electricity price path*

Environmental rules and implementation*

Wheeling/grid access/generation license*

ESCOs

Financial viability of projects

Carbon tax and offsets*

Regulatory/ policy uncertainty*

PPA liability on balance sheet

Access to waste

Lack of options

Require large uniterupted electricity suppy (rely on Eskom)

Technology risk

Electricity pricing/contracting*

Fragmented environmental regulations*

Lack of cost pass-through in liquid fuels*

200


Figure 64: Recommendations to increase investment in low carbon projects

43 comments from stakeholders or focus groups were captured

0 1 2 3 4 5 6 7 8

Support to ESCOs/service providers

Increase ability to feed into grid/wheel power

R&D and skills funding

Provide mitigation policy certainty

Address energy sector policy uncertainty

Consistent implementation of National Waste Act

Pool of low cost funding

Develop LNG market and infrastructure

Clarify diesel rebate policy

Import quality inspection

Instruments to overcome long pay-back periods

Mechanism to fix long-term interest rates in…

One-stop shop for environmental regulations

Provide capital subsidy or upfront funding

Long-term electricity supply contracts to fix…

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