The value of coal

Alarm bells are going off as new investments in fossil fuel projects may far exceed the carbon budget that SA is allowed, which means investors could end up with billions of rands of stranded assets – assets paid for, but without value of benefit – in 20 years’ time, which taxpayers will have to fund. This is because fossil fuel plants that emit carbon would have used up the carbon allotment SA committed to in the historic Paris Agreement, and the plants would have to be shut down. Expensive infrastructure such as railways and mines would become obsolete. However, power utility Eskom, banks such as Nedbank and energy investors still believe there is a bright future for coal projects in the country. Yolandi Groenewald investigates.

THE CASE AGAINST

All of South Africa’s planned coal power stations fall within the outdated Integrated Resources Plan (IRP), which determines the country’s energy policies.

Jesse Burton, a researcher at the University of Cape Town’s Energy Research Centre, said there was a huge disconnect between the current energy policy and the pledges South Africa made in the Paris Agreement to cap emissions.

“There is mismatch between the IRP and the least cost mitigation plan,” said Burton, whose team examined several potential future energy simulations. The least cost mitigation plan is the cheapest investment option available to rid South Africa of its coal dependancy.

The country has a carbon budget limit of 14 gigatons to 2050, but cumulative emissions of new coal projects in the pipeline, such as Medupi and Kusile, will spend at least about 7.4 gigatons of that budget between now and 2050.

“And eight gigatons of the budget is gone, before Medupi and Kusile even come online,” she said.

“Our research showed that we should not be building new coal power plants only to turn them off when the world tells us to. It is extremely risky to plan new plants that you won’t reap profits from.”

Sasol, South Africa’s second-biggest carbon emitter, plans to run its coal-to-liquids plant until at least 2040.

If Sasol’s plant is not turned off sooner, coal-fired power will shut down much sooner at a high cost. Burton said the research showed that it was cheaper to shut down Sasol than retire South Africa’s new coal power plants early.

“If Sasol’s plant keeps on running, other sectors will have to take up the burden,” she said.

Internationally, economists are also increasingly concerned that the fossil fuel bubble might be the next to burst, as regulations to limit climate change forces fossil fuel investment out of business. For the past two years, coal use has dropped globally.

Big banks such as JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley are backing away from coal. According to an analysis done by Citigroup, there could be $100 trillion (R1 384 trillion) of potential stranded assets in the fossil fuel industry in the next few years.

Ratings agency Moody’s also recently warned that coal “has undergone a long-term structural decline, with little prospect for near-term recovery”.

In December, Bank of England governor Mark Carney warned that the majority of the world’s fossil fuel reserves could become stranded assets if the world implemented the emissions caps of the Paris Agreement.

More than half the assets in the global coal industry are now held by companies that are either in bankruptcy proceedings or don’t earn enough money to pay their interest bills, according to data compiled by Bloomberg.

THE CASE FOR

Eskom, which has invested in two of the world’s biggest coal-fired plants, and developers such as Pele Natural Energy, a joint developer in the new privately owned Khanyisa coal power plant, believe that it is critical for South Africa’s developing economy to build new coal power stations.

An Eskom spokesperson said that any policy-driven transition to a low-carbon society must take into account the overriding priority to address poverty and inequality.

“Zero growth in CO2 emissions from 2025 means no new coal coming online after 2025 without decommissioning or lowering load factors,” he said. Based on the current coal burn of 113 megatons a year, Eskom calculates it would have to reduce to 27 megatons a year, which is equivalent to shutting down more than half of South Africa’s current collieries.

“This will have an impact on job security in the coal mining sector, which is the largest employer of semiskilled and unskilled labour,” said the spokesperson.

Eskom said the answer was not simple, adding that a balance needed to be found regarding loss of jobs, poverty eradication, affordability and aspirations for a lower carbon output. “All of these are national priorities, and they are conflicting.”

Nedbank is part of the lending pool on both of the privately owned coal projects, together with other South African commercial banks. Spokesperson Joanne Isaacs said Nedbank had to date invested R35 billion in renewable energy projects, but the bank believed that the base load provided by coal was still a critical component in the energy mix as it complements the intermittent nature of renewable energy generation.

“By funding projects in coal, Nedbank is lending into a sector that is critical to economic growth and energy security, playing a vital role in South Africa’s development,” she said.

“Further, the funding requirements of the coal independent power producer procurement programme are of such a scale that the support of all South African lending institutions is required.”

But she said the bank would gradually scale down its investments in fossil projects and would increase investments in renewables.

Obakeng Moloabi, executive director at Pele Natural Energy, agreed that, globally, it was becoming more difficult to finance coal, adding that it was important to grow a renewable portfolio and increase investment into the sector.

“But we can’t ignore South Africa’s context. When you talk about stranded assets in 2050, you have to balance it against the country of today. South Africa needs to create jobs, and coal offers more job opportunities than renewables do.”

He said Khanyisa’s developers had to secure finance over the long term. “Our financing package enables us to pay back debt timeously.”