CLEAN TECHNOLOGY FUND REVISED INVESTMENT PLAN FOR SOUTH AFRICA

Transcription

1 CTF/TFC.4/4/Rev.1 November 9, 2009 Meeting of the CTF Trust Fund Committee Washington, D.C. October 27, 2009 CLEAN TECHNOLOGY FUND REVISED INVESTMENT PLAN FOR SOUTH AFRICA

2 Note: The CTF Investment Plan for South Africa was revised to include the AfDB and private sector co-financing amounts which were inadvertently omitted in the previous version.

3 Clean Technology Fund Investment Plan for South Africa Executive Summary Introduction 1. This Clean Technology Fund Investment Plan for South Africa proposes CTF cofinancing of $500 million to support South Africa s goals of generating four percent of the country s electricity requirements from renewable energy by 2013 and improving energy efficiency by 12 percent by Specifically, the Investment Plan proposes CTF co-financing for grid-connected solar thermal power, utility-scale wind power development, solar water heaters, and energy efficiency, particularly in the commercial and industrial sectors. The CTF investments will mobilize financing of about $1 billion from bilateral and multilateral financiers, plus private sector financing. A Phase 2 of the Investment Plan is expected to include substantial investment in low carbon transport, on the basis of a transport sector greenhouse gas inventory that the Government is currently undertaking. Country and Sector Context 2. The 15 years since the end of apartheid have witnessed South Africa s transformation into a stable and robust economy, with a four percent average annual economic growth rate over the past ten years. Strong GDP growth in South Africa has important regional implications, given the inter-linkages between its economy and the rest of Africa. This strong economic performance has resulted in a 60 percent increase in demand for electricity by industry and households between 1994 and 2006, with coal accounting for 75 percent of total energy consumption. South Africa s historically lowcost energy supplies, together with the predominance of extractive industries, have combined to create a relatively energy-intensive economy, although there has been a reduction in energy intensity relative to South Africa is the eleventh largest emitter of CO 2 globally and its per capita emissions are the eighth highest in the world. The energy sector is the single largest source of CO 2 emissions, with coal accounting for more than 90 percent of total emissions by fuel source. The transport sector represents about percent of South Africa s greenhouse gas emissions, and emissions from the sector are expected to grow by about 17 percent between 2007 and If South Africa continues with a businessas-usual growth path, its emissions will almost quadruple by Priority Sectors for GHG Abatement 4. South Africa s Long-Term Mitigation Scenarios (LTMS) have allowed for the development of national climate policy based on what is required by science to limit temperature increase to two degrees Celsius above pre-industrial levels. The LTMS developed several mitigation scenarios designed to illustrate how the huge gap between Growth without Constraints and the Required by Science cases (about 1,300 million

4 tons of CO 2 or almost three times current levels) could be closed. The policy-relevant scenarios include: (a) The Start Now scenario, which reflects immediate implementation of policies already articulated but not yet implemented, such as efficiency in industry and transport, as well as more renewable energy and nuclear sources for electricity. This scenario significantly reduces the growth in CO 2 emissions; (b) The Scale-Up scenario can yield a leveling off in CO 2 emissions by 2050 through a transition to zero-carbon electricity, with nuclear power and renewable energy expanding to 50 percent of electricity generated; and, (c) The Use the Market scenario relies on economic instruments (such as carbon taxes), which would achieve almost three-quarters of the reductions needed to achieve the Required by Science scenario. (d) The Reach for the Goal scenario fills the remaining gap through investments in new low carbon technologies, changes in consumer behavior, and restructuring of the economy away from coal towards more climate-friendly energy sources. 5. In response to the LTMS, the Cabinet has adopted the following mitigation strategies: (a) Implement the Start Now options, focusing on accelerated energy efficiency across all sectors --industrial, commercial, transport and residential; (b) Invest in the Reach for the Goal strategy, including ambitious low carbon technology research and development, new clean energy resources, and behavioral change; and, (c) Pursue regulatory mechanisms contained in the Scale-Up scenario, together with the economic instruments from the Use the Market scenario. As a result of these strategies, emissions would grow, albeit at a reduced rate, in the short term, plateau by 2030, and decline gradually thereafter. 6. Specific Government policies stemming from the Cabinet decision include: (a) Ambitious, mandatory targets for energy efficiency; (b) Adopting levies on CO 2, beginning with a levy on coal-fired power production; (c) Introducing more stringent thermal efficiency and emissions standards for coalfired power stations; (d) Providing incentives for private sector-led renewable energy development via feed-in tariffs; (e) Developing carbon capture and storage for coal-fired power stations and coal-toliquid plants; and, (f) Reducing transport emissions through fuel efficiency standards, modal shifts towards public transport, and promotion of hybrid and electric vehicles. Rationale for Selected Sectors for CTF Co-Financing

5 7. The priority activities selected for CTF co-financing are: (a) Final design and risk mitigation review, followed by construction and operation of Eskom s proposed 100 MW-capacity Upington Concentrated Solar Power (CSP) plant, which will be the first-ever commercial scale CSP plan in sub-saharan Africa. CTF financing would be used to reduce the high capital cost and/or to mitigate potential risks, such as cost overruns and/or performance risks, through risk mitigation instruments. CTF support would have the transformational effect of promoting CSP deployment, particularly in the private sector, by proving the technology in actual operation and establishing benchmarks for cost and performance. The particular promise of CSP in the LTMS is the fact that it provides a realistic alternative to coal power plants for base load capacity. (b) Development of the first utility-scale wind power plant -- Phase 1 of Eskom s Western Cape Province Wind Energy Facility, consisting of a 100 MW wind farm -- as well as support to pioneer private sector projects amounting to 100 MW new generation capacity. CTF support would transform the nascent wind sector by creating a robust pipeline of large-scale wind power projects, based on proven construction and performance experience in the South African context. In addition, the investment program would address first-mover costs and risks related to negotiating bankable power purchase agreements and learning processes involved in local lenders and contractors engaging in wind development for the first time. Investments in transmission capacity to connect Independent Power Producers to the grid would catalyze substantial private sector investment in wind power. (c) Support to municipalities and the private sector in a large-scale program to deploy solar water heaters SWH), with a target of achieving 50 percent of the Government s ambitious goal of converting 1 million households from electric to solar water heating over the next five years. CTF support would accelerate SWH market penetration and development of a domestic SWH industry by buying down high installed cost, market development, and demonstrating business models. (d) Scale up energy efficiency investments by catalyzing the expansion of bank lending to the commercial and industrial sectors through lines of credit to commercial banks, contingent financing to foster energy service companies (ESCOs), and financial incentives or risk products to market leaders, such as large industrial customers. CTF support would seek to address barriers to energy efficiency investments, such as high preparation and other transaction costs, perceived risk of energy efficiency projects on the part of commercial lenders, and organizational biases against investing in cost reduction. 9. Potential for GHG reduction: Cumulative emissions savings from the CSP and wind plants over a projected 20-year plant life would be nine million tons and five million tons of CO 2, respectively. The SWH conversion program could result in cumulative emissions savings of about 32 million tons of CO 2, assuming a 20-year life. It is more difficult to estimate the emissions savings from the energy efficiency sub-

6 sector, given the nature of the investments; however, an initial estimate suggests annual emissions savings of about nine million tons of CO Demonstration potential: The replication potential of CSP plants in southern Africa is vast; in South Africa alone, Eskom estimates 40 GW of commercially viable CSP in the Northern and Western Cape provinces. Replication in Namibia and Botswana could double or treble this potential. Wind power, too, has considerable potential for scale-up at an estimated 10,000 GW of economic wind potential. The market for SWH is significant; a 50 percent market penetration for the seven million households with water heaters would treble the Government s one million SWH target, in line with the LTMS estimate of 307 million tons of CO 2 reduction by SWHs over 40 years. Given South Africa s energy intensity, the scalability potential of energy efficiency interventions is substantial. Realization of the national target laid out in the National Energy Efficiency Strategy (i.e. 12 percent reduction in electricity consumption) would represent electricity savings of 110,000 GWh. 11. Development impact: Since most of the component value of CSP and wind power plants can be sourced locally, the economic and social benefits of these renewable technologies would include domestic industrial development and employment. The SWH program would also have very substantial benefits for the South Africa economy and specifically for low-income households as a result of lower electricity bills (in the context of rising tariffs), as well as increased jobs in a growing domestic SWH manufacturing service industry, particularly in small and medium enterprises. Energy efficiency measures play an important role in limiting the need for new generation capacity, which imposes a significant fiscal burden on the South African economy as a whole. All the interventions will have environmental co-benefits such as reduced NOx, SOx and particulates emissions from avoided coal-fired base load power plants. 12. Implementation Potential: The most significant enabling policy in place for renewable energy sources is the feed-in tariffs recently established in South Africa. The Government is also undertaking a number of enabling efforts, such as updating the wind atlas, outreach programs, and development of the grid code. The CTF financed SWH program would implement a national strategy for SWH market development that is currently under development through a GEF-supported project. For energy efficiency, a Standard Offer mechanism under which any energy user or energy service company that can deliver energy or demand savings would be paid a fixed amount is being rolled out and would provide a favorable basis for private sector-led energy efficiency project development. A generic risk for all investments is the low cost of electricity, pending projected rate increases, to which the Government is committed. 13. Additional costs and risk premiums: The capital cost of the CSP plant is projected to be more than three times that of a supercritical coal-fired power plant. Adjusting for fuel and operations and maintenance costs, there still remains a viability gap of more than 1 Rand/kWh, in addition to substantial commercial and performance risks and cost uncertainties. Similarly, the production cost gap between a typical wind farm and a new supercritical coal-fired power plant is about 0.7 Rand/kWh. South Africa s feed-in tariff is expected to attract wind developers, but there remains a need to address the additional

7 costs and risks of first-movers: such as grid connection and transmission infrastructure, as well as the transaction costs of project development and financing. SWH will require bulk procurement to bring down costs and ensure quality of equipment, as well as financial incentives to address affordability issues faced by low-income consumers. In the energy efficiency subsector, CTF support would help provide easier access to financing and risk mitigation instruments to provide positive incentives alongside tariff increases. Table 1: Results indicators for the CSP Subsector Indicators Baseline Investment Program Results Installed Grid-Connected Solar 0 (2009) 100 MW e of new solar capacity Thermal Power Capacity in South Africa Estimated annual GHG emission 0 (2009) 0.45 MT CO 2e /year reductions Rapid replication potential towards Govt s goal of 4 % renewable energy power production by (2009) 100MW new STP plants per year for four years yields 2,064 GWh annual production by 2013 Table 2: Results Indicators for the Wind Power Sub-sector Indicators Baseline Investment Program Results Installed Wind Power 20 MW (2009) 200 MW of new wind power Capacity in South Africa capacity (100MW public, 100MW private) Estimated annual GHG 0.04 Mt CO2 e (2009 est.) 0.50 MT CO2 e per year emissions reductions Rapid replication potential towards Govt s goal of 4% renewable energy power production (e.g., 10,000 GWh) by GWh (2009 est.) 10 total new 100 MW wind farms would produce 2,700 GWh annual output Table 3: Results Indicators for SWH Subsector Indicators Baseline Investment Program Results Installed Commercial and Household SWHs 25,000 SWH installations (2009) 500,000 SWH installations Estimated annual GHG Mt CO2 e 1.62 Mt CO2 e per year emissions reductions Rapid replication potential 90 GWh 1 million SWH installations towards Govt s goal of 4% would reduce electricity renewable energy power production (e.g., 10,000 production needs by 3600 GWh/year GWh) by 2013

8 Table 4: Energy Efficiency results indicators Indicators Baseline Investment Program Results Installed Industrial, 1,000 GWh (2008 Eskom 10,000 GWh Commercial and Household EE actual results) Estimated annual GHG 0.9 Mt CO2 e ( Mt CO2 e per year emissions reductions Rapid replication potential towards Govt s goal of 12% reduction in 2015 projected consumption Eskom actual results) 1,000 GWh 10,000 GWh yields 10 percent of the 110,000 GWh required to meet the 2015 goal Table 5: Indicative Financing Plan (in US$ millions) Project CTF AD B IBR D IBRD AD IF B C IFC EIB Kf W AFD Private Sector ADB (privat e sector) Eskom CSP Total Eskom Wind Private Sector ,350 Renewable energy/energy efficiency/swh Total ,350

9 CURRENCY EQUIVALENTS (Exchange Rate Estimated as of September 21, 2009) Currency Unit = Rand Rand 8.00 = US$1 FISCAL YEAR April 1 March 31 ABBREVIATIONS AND ACRONYMS AFD AfDB BRT CFL CIPA CO2 CTF DoE DPE DSM EIA ESCO ESMAP GEF GHG HVAC IBRD IDC IFC IP IPP LTMS MDB MPD PCP PPA PV REFIT SANERI SME STP SWH Agence Francaise de Developpement African Development Bank Bus Rapid Transit Compact Florescent Lamp Climate Investment Program for Africa Carbon dioxide Clean Technology Fund Department of Energy Department of Public Enterprises Demand Side Management Environmental Impact Assessment Energy Services Company Energy Sector Management Assistance Program Global Environment Facility Greenhouse gas Heating, Ventilation, and Air Conditioning International Bank for Reconstruction and Development Industrial Development Corporation International Finance Corporation Investment Plan Independent Power Producer Long Term Mitigation Scenario Multi-lateral Development Bank Municipal Power Distributor Power Conservation Program Power Purchase Agreement Photovoltaic Renewable Energy Feed-In Tariff South African Energy Research Institute Small and Medium Enterprise Solar Thermal Plant Solar Water Heating

10 Table of Contents I. INTRODUCTION... 1 II. COUNTRY AND SECTOR CONTEXT... 1 III. PRIORITY SECTORS FOR GHG ABATEMENT... 6 IV. RATIONALE FOR SELECTED SECTORS Grid-Connected Solar Thermal Power (STP) Utility-Scale Wind Power Development Solar Water Heaters (SWH) Energy Efficiency V. ENABLING POLICY AND REGULATORY ENVIRONMENT Grid-tied Solar and Wind Power Development of Solar Water Heating Energy Efficiency VI. IMPLEMENTATION POTENTIAL VII. FINANCING PLAN AND INSTRUMENTS World Bank (IBRD) African Development Bank International Finance Corporation Bilateral Donors (European Investment Bank, KfW, Agence Francaise de Developpement) Financing Plan ANNEX 1 Eskom Investment Support Program Low Carbon Components: Concentrating Solar Power (CSP) and Wind Power Problem Statement Proposed Transformations Implementation Readiness Rationale for CTF Financing Financing Plan ANNEX 2 PRIVATE SECTOR RENEWABLE ENERGY AND ENERGY EFFICIENCY PROGRAM Problem Statement Proposed Transformations Rationale for CTF financing Implementation Readiness Financing Plan... 38

11 I. INTRODUCTION 1. The Clean Technology Fund (CTF)1 Investment Plan is a business plan agreed among, and owned, by the Government of South Africa for the International Bank for Reconstruction and Development (IBRD), the African Development Bank (AfDB), and the International Finance Corporation (IFC). It supports the low-carbon objectives and priorities outlined in South Africa s Long-Term Mitigation Scenarios (LTMS), its National Climate Change Response Strategy of 2004, Renewable Energy White Paper of 2005, and National Energy Efficiency Strategy of This multi-year Investment Plan (IP) identifies transformational programs to be co-financed by the CTF jointly with the IBRD, AfDB, and IFC. It will be presented to the CTF Trust Fund Committee in October The IP is a dynamic document, with the flexibility to take into account changing circumstances and new opportunities. Such flexibility is particularly important in the private sector and all the more necessary during the current period of uncertainty associated with worsening global economic conditions and financial markets. 3. This IP reflects the experience and results of IBRD, AfDB, and IFC engagement on climate change and development since IBRD, through the Energy Sector Management Assistance Program (ESMAP) and the Global Environment Facility (GEF), has supported South Africa s efforts to develop a long-term mitigation strategy and to transform the markets for renewable energy and energy efficiency. IFC has supported South Africa s private sector mitigation efforts with carbon finance investments under the Clean Development Mechanism, and has worked with financial intermediaries in South Africa to develop their lending for energy efficiency projects. IBRD and AfDB are also engaged in parallel efforts to support the New Build and Major Maintenance programs of Eskom, the public power utility (i.e., Eskom s capital expenditure investment plan). II. COUNTRY AND SECTOR CONTEXT 4. The 15 years since the end of apartheid have witnessed South Africa s transformation into a stable and robust economy. Prudent economic management and a supportive global environment have helped the country to attain a 4 percent average annual economic growth rate over the past 10 years. South Africa s growth is also important regionally, given the inter-linkages between its economy and the rest of Africa. South Africa accounts for nearly one-third of Sub-Saharan Africa s GDP and more than two-thirds of the combined GDP of the 14 Southern African Development Community (SADC) members. 1 The Clean Technology Fund invests in projects and programs that contribute to the demonstration, deployment, and transfer of low carbon technologies with a significant potential for long term greenhouse gas emission savings. The CTF Trust Fund Committee oversees the operations of the Fund. The World Bank (IBRD) is the Trustee of the Fund. 1

12 5. The Government of South Africa s development strategy is economic growth with equity. It has two main pillars. First, the strategy addresses key social and economic constraints to greater equity, defined in terms of access to job opportunities, housing, education and training, health services; and enhances the Government s capacity to deliver these essential services. Second, the strategy creates an enabling environment for economic growth, including through investments in the energy sector. 6. After several years of sustained economic growth, supported by reliable and sufficient electricity supply, South Africa's electricity system is now under considerable strain. The electricity sector, though generally operationally efficient, has run into major capacity constraints during the last few years, and especially in Demand for electricity by industry and households increased by 60 percent from , but no new generating capacity came on-stream from Power rationing and other measures instituted to prevent the electricity system from collapsing have affected the entire economy, especially the country's mining industry, leading to shutdowns of the largest mining operations and putting thousands of jobs at risk. The impact of the global economic slowdown and electricity disruptions led to a 1.7 percent drop in GDP growth in the first quarter of 2008, resulting in the lowest rate in more than six years. 7. The Government has responded quickly to the energy crisis, assigning the highest priority to improving the generation capacity and the reliability of electricity supply. To meet the country s forecast demand growth (more than 12 GW in 5-7 years), Eskom has started constructing two new coal-fired plants. There is no other low-cost (or low-carbon) generation option available in the required timeframe that could substitute for the coal option and ensure energy security. At the same time, the Government needs to be supported, particularly during the current economic crisis, to achieve its commitment to reduce greenhouse gas (GHG) emissions in the long term, as outlined in its Long-Term Mitigation Scenario (LTMS). 8. South Africa is the largest contributor to GHG emissions in Africa. According to the LTMS, emissions were 415 million tons of carbon dioxide equivalent (MtCO 2 e) in 2000, placing South Africa as the 11 th largest emitter globally. The country s emissions per capita are about 10 tons of CO 2 /person, the eighth highest in the world (see Figure 1). 2

13 Ton CO2e per capita Figure 1 Cross Country Comparison of CO2 Emissions Per Capita CO2/capita 5 0 US Canada Russia Japan Germany UK South Korea South Africa Italy France Mexico China Brazil India Country Source: World Bank and International Energy Agency, The energy sector is the single largest source of CO 2 emissions, accounting for more than 70 percent of the total CO 2 emissions in the country. This is mainly because of South Africa s heavy reliance on coal to meet its primary energy needs (75 percent of total energy consumption in 2004 was from coal). Coal-fired power production accounts for almost half of CO 2 emissions, but synthetic fuel production, energy-intensive industries (mining, iron and steel, cement), and transport are also important contributors (see Figure 2). If South Africa continues with a business-as-usual growth path, its emissions will almost quadruple to 1600 million tons of carbon dioxide equivalent by Figure 2 Figure 3. Sectoral CO 2 Emissions in South Africa Others 1% Residential/commer cial 3% Agriculture Sector 5% Transport 13% Industry 15% Synfuel 16% Electricity 48% Electricity Synfuel Industry Transport Agriculture Sector Residential/commercial Others Source: South African Department of Energy, Coal dominates primary fuel consumption in South Africa. Since the 1960s, coal has accounted for more than 90 percent of total CO 2 emissions (see Figure 3). Small amounts of liquid and gas fuels, mostly imported, are used primarily in transportation. 3

14 Thousands of Metric Tons This reliance on coal and the lack of cleaner fossil fuels makes renewable energy of vital importance to satisfying growing energy demand in the medium to long term. Figure 3 CO2 Emissions by Fuel Source - South Africa 450, , , , , , , ,000 50,000 0 Total Fossil Fuel Emissions Gas Fuels Liquid Fuels Solid Fuels Year Source: Oak Ridge National Laboratory, South Africa s historically low-cost energy supplies, together with the predominance of extractive industries, have combined to create a relatively energyintensive economy. Although South Africa ranks 42 nd globally in GDP, it is 21 st in terms of energy consumption. The result is both a high energy intensity per capita (Figure 1) and a high energy intensity per unit of economic output (see Figure 4). Although the period has seen some reduction in energy intensity, there are clearly large opportunities for technical improvements in utilization of primary energy inputs. 12. The transport sector also represents about percent of South Africa s GHG emissions, and emissions from the sector are expected to grow by about 17 percent between 2007 and The transport sector has great potential to reduce its carbon footprint through some relatively inexpensive interventions, including shifting passengers towards public transport, particularly bus rapid transit (BRT). 4

15 TOE/million $ (2000) Figure 4: Energy Intensity of the South African Economy, Energy Intensity per unit GDP Year Energy Intensity per unit GDP Source: World Resources Institute, South Africa is highly vulnerable to climate change, particularly in the areas of human health, agricultural production, plant and animal biodiversity, water resources, and rangelands. If the business as usual approach continues, it is projected that an additional 5.2 million people will be at risk of malaria in the expanded areas prone to malaria over the next 50 years in South Africa, as a consequence of prolonged summers. In addition, maize production will decrease by approximately 10 to 20 percent at a time when food demand is expected to grow. It is the poor who are usually confined to living in riskprone areas and are the first to suffer the consequences of climate change. Therefore, global efforts to mitigate human-induced climate change are consistent with South Africa s national interest. 14. The Government of South Africa is a leading voice in the developing world on climate change issues. The Government has committed to doing its part to stabilize global temperature at 2 degrees Celsius above pre-industrial levels, as recommended by scientific consensus. Recognizing South Africa s development needs, the mitigation strategy the Government has adopted envisages an increase in emissions over the short term, stabilized emissions by , followed by an emissions decline in absolute terms by mid-century. 15. South Africa has taken concrete steps towards realizing these long-term goals. In particular, South Africa has: Ratified the United Nations Framework Convention on Climate Change (UNFCCC) in August 1997, and acceded to the Kyoto Protocol in July 2002; Developed a National Climate Change Response Strategy in 2004, outlining a broad range of principles and policy measures for mitigation and adaptation to climate change; 5

16 Adopted a White Paper on Renewable Energy in 2005, setting a target of 4 percent of electricity supply (equivalent to 10,000 GWh) from renewable energy sources by 2013; Adopted a National Energy Efficiency Strategy in 2006 (updated in 2009), setting ambitious national targets for energy efficiency improvement (12 percent by the year 2015). A National Energy Efficiency Agency was also established to pursue this target through various energy conservation programs; Completed a major analytical study in 2008, identifying the priority sectors for carbon mitigation, as part of a pioneering effort among developing countries to combine high-quality research with extensive stakeholder consultations. Based on this process, South Africa has put forward aggressive Long-Term Mitigation Scenarios (LTMS) to address priority climate change issues; Implemented the Renewable Energy Feed-In Tariff (REFIT) program in 2009, under which the National Energy Regulator of South Africa (NERSA) provides price incentives for the development of power projects that use renewable energy. III. PRIORITY SECTORS FOR GHG ABATEMENT 16. South Africa s Long-Term Mitigation Scenarios have allowed for the development of a national climate policy based on what is required by science to limit temperature increase to 2 degree Celsius above pre-industrial levels. This is a groundbreaking effort to create a model-based linkage between mitigation scenario projections and policy options for the Government. Because of its rigor and utilization of available data, the LTMS provides an ideal underpinning for low-carbon investment planning. The conclusions of the LTMS are that the largest emission reductions will come from three energy pillars energy efficiency, renewable energy, and nuclear; and two transport pillars passenger modal shift and vehicle fuel efficiency. 17. The LTMS developed three basic scenarios for South Africa s climate change policy: (a) the Growth Without Constraints, or business as usual scenario, in which CO 2 emissions quadruple by 2050; (b) the Current Development Path, which represents the Government s energy and transport polices as currently articulated; and (c) the Required by Science scenario, which yields a CO emissions trajectory that plateaus by 2030 followed by gradual decline (see Figure 5). The gap between these two 2050 outcomes is projected at 1300 MT CO 2, or almost three times current levels. 6

17 Figure 5. Comparison of LTMS Mitigation Scenarios Source: South African Department of Environmental Affairs [2008] 18. The LTMS developed several mitigation scenarios designed to illustrate how the huge gap between the Growth without Constraints and the Required by Science cases could be closed. Policy-relevant mitigation scenarios include: (a) the Start Now scenario; (b) the Scale-Up scenario; (c) the Use the Market option; and finally, (d) the Reach for the Goal scenario, based on the South African contributions needed to limit global temperature increase to 2 degrees C by 2050 (see Table 1). 19. The Start Now scenario reflects immediate implementation of policies already articulated but not yet implemented. The largest components of this scenario are efficiency in industry and transport (greater vehicle efficiency and shifts from private to public transport), as well as more renewable sources and nuclear sources for electricity. The Start Now scenario significantly reduces the growth in CO 2 emissions compared to the Growth without Constraints case, but cannot stop the absolute growth in emissions. 20. The Scale-Up scenario is much more aggressive than the Start Now scenario and can yield a leveling-off in CO 2 emissions, but only by mid-century. It accomplishes this mainly through a transition to zero-carbon electricity, with nuclear power and renewable energy expanding to 50 percent of electricity generated by This scenario relies significantly on mature carbon capture and storage technologies. Other important components of this scenario include biofuels and electric vehicles, in addition to all previous transport modes, plus the full portfolio of energy efficiency technologies. 7

18 Table 1. Summary of Key LTM Scenarios Source: South African Department of Environmental Affairs,

19 21. The Use the Market scenario relies on carbon taxes, which are phased in beginning with the already-announced levy on fossil fuel electricity. This case assumes that subsidies are provided via the REFIT tariff, standard offer, or other mechanisms to increase energy efficiency. It also assumes the use of solar water heating (SWH), renewable energy, and bio-fuels. This scenario, focused on economic instruments, including taxes and subsidies, has a very large impact on GHG emissions and demonstrates the importance of enabling frameworks and policies. 22. Although the Scale-Up scenario closes the gap between the Required by Science and Growth without Constraints scenarios by about two-thirds, and the Use the Market scenario achieves almost three-quarters of the reductions needed to limit global temperature increase to 2 degrees C by 2050, some residual emissions reductions remain. The Reach for the Goal scenario fills the remaining gap to achieve the Required by Science trajectory. Additional actions needed include investment in new low-carbon technologies, changes in consumer behavior, importation of low-carbon energy resources, and restructuring of the economy away from coal and towards more climate-friendly energy sources. 23. In response to the LTMS and parallel stakeholder consultations, the Cabinet has adopted the following mitigation strategies: Implement the Start Now strategic option, focusing on accelerated energy efficiency and conservation across all sectors, especially industrial, commercial, transport, and residential; Invest in the Reach for the Goal strategy, including ambitious carbon-friendly technology research and development, new clean energy resources, and behavioral change; Pursue regulatory mechanisms contained in the Scale-Up scenario, together with economic instruments from the Use the Market scenario (e.g., taxes and incentives). 24. Specific Government policies stemming from the Cabinet decision include: (a) ambitious, mandatory targets for energy efficiency; (b) adopting levies on CO 2, beginning with a levy on coal-fired power production; (c) introducing more stringent thermal efficiency and emissions standards for coal fired power stations; (d) providing incentives for private sector-led renewable energy development via feed-in tariffs; (e) developing carbon capture and storage (CCS) for coal-fired power stations and coal-to-liquid (CTL) plants; and (f) reducing transport emissions through fuel efficiency standards, modal shifts towards public transport, and promotion of hybrid and electric vehicles. Table 2 summarizes the LTMS marginal abatement cost for South Africa, with passenger modal shift as the most money-saving cost option (i.e., Rand -1131/t C0 2 ). 9

20 Table 2. LTMS Marginal Abatement Cost Mitigation potential Mitigation cost (R/t CO 2 ) 2050 (MTCO 2 ) Energy Sector Industrial energy efficiency Renewable energy extended Nuclear extended Solar water heaters Transport Sector Passenger modal shift Improved vehicle efficiency Synfuels CCS Source: South African Department of Environmental Affairs, 2008 IV. RATIONALE FOR SELECTED SECTORS 25. Under the Investment Plan, Clean Technology Fund (CTF) funds would be used to support the Government s specific goals of (a) generating 4 percent of the country s electricity requirements (about 10,000 GWh) from renewable energy by 2013; (b) improving energy efficiency by 12 percent by 2015; and (c) modal and technology shifts in transport, including shifts from private to public modes for passengers, shifts from road to rail for freight, and introduction of clean passenger vehicles such as electric vehicles. 26. The Investment Plan would have two phases. Phase 1 would include projects in the energy sector that are ready for multilateral development bank (MDB) and CTF-supported implementation within the next 12 to 18 months. The notional CTF allocation for Phase 1 is US$500 million. Priority areas for investment include public and private sector-led, gridconnected solar, thermal, and large wind power projects; as well as private sector and municipality-led solar water heating and energy efficiency, including demand-side management. 27. Other eligible projects that may not be ready for MDB support at this time would be slated for Phase 2 of the Investment Plan, subject to the availability of additional CTF funds. Phase 2 is expected to include substantial investments in low-carbon transport, which is a significant piece of South Africa s LTMS. The Government is currently undertaking a greenhouse gas inventory for the transport sector, which will provide the basis for policy direction and program priorities for modal shifts for passenger and freight transport, and particularly for a modal shift from road to rail. Transport interventions with strong potential for Phase 2 include: Electric vehicles. The Government is supporting a research and development program on an electric vehicle (EV), with a view to towards mass production by The EV is currently approaching the concept stage, which will be followed by design, build and test phase that is expected to last about 30 months. Once the EV has reached the commercial deployment stage, MDB/CTF financing could be utilized to support a broader 10

21 government initiative for market development, through necessary policy measures, financial incentives and risk mitigation for scale-up for EVs. Bus rapid transit. Government is launching a national BRT program for a number of cities. Such systems, when appropriately integrated with other transport modes, could be transformational in the urban space. 4.1 Grid-Connected Solar Thermal Power (STP) 28. At the present time, almost all of the power requirements for Eskom are provided by large coal-fired power stations. These power stations operate in conjunction with gas-fired peaking turbines and pumped storage facilities to provide the power needs of the country. As noted above, the energy sector accounts for more than 70 percent of South Africa s CO 2 emissions. To reduce emissions, the Government has set a goal of generating 4 percent of electricity consumption from renewable energy by A particularly promising renewable energy resource for South Africa is solar thermal power. Eskom has designed the first-ever commercial-scale Concentrating Solar Power (CSP) plant in southern Africa. Depending on how it is configured, grid-connected solar thermal power (STP) can provide large volumes of firm generation capacity, comparable to what is currently provided by coal-fired power plants. 30. This CSP facility, known as the Upington Concentrating Solar Power plant, is a 540 MW t tower and mirror design configured to operate as a base load unit. The design utilizes molten salt as a thermal circulating fluid and storage medium, which will allow the plant to achieve a percent annual load factor, with a rated capacity of 100MW e. 31. The estimated cumulative emissions savings resulting from a projected annual energy production of 516 GWh is 9 million tons of CO 2 over a projected 20-year plant life. This facility, when constructed, would be the largest CSP facility in the world. Successful construction and operation of a commercial utility-scale base load solar power unit is a priority for Eskom and the Government. 32. The replication and scalability potential of STP plants in southern Africa is vast. Eskom has estimated that there is about 40 GW of commercially viable STP in the Northern Cape and Western Cape provinces alone. Replication elsewhere in the region (Namibia, Botswana) would double or treble this potential. Since most of the component value of these power plants can be sourced locally, the economic and social co-benefits of STP would include industrial development and jobs creation. Environmental co-benefits would include reduced NO X, SO X, and particulates emissions from avoided coal-fired base load power plants 33. Priority activities for the STP subsector include final design and risk mitigation review, followed by construction and operation of the Upington CSP facility in Northern Cape Province. 34. The cost of this facility, including site preparation and interconnection, is estimated at 6.5 billion Rand, or $8,000/kW. This compares to 96 billion Rand, or $2.400/kW, for the Medupi 11

22 supercritical coal-fired power plant. Factoring in lower fuel costs for a solar thermal power plant, partially offset by higher operation and maintenance (O&M) costs, the difference in production costs for a new super-critical coal-fired power plant and a solar thermal power plant is more than 1 Rand/kWh. In addition to being more costly, the initial CSP plants will have higher commercial and performance risks than a state-of-the-art coal-fired power plant. Eskom intends to obtain warranties from each of the major component suppliers; however, as a first-ofits-kind facility in Sub-Saharan Africa, there remains substantial uncertainty regarding capital cost (variability estimated as ±25 percent), performance as measured by annual kwh output (variability estimated at ± 20 percent), construction schedule, and operating and maintenance costs (variability estimated at ± 25 percent). For these reasons, the Eskom Board has requested a design and risk mitigation review before approving the project. The high capital cost and high risk involved in constructing and operating this CSP power plant, as well as the transformational nature of the base load power plant technology, make the project a strong candidate for CTF concessional lending. The CTF would be used to reduce the high capital costs and/or to mitigate potential specific risks, such as cost overruns and/or performance risks, through contingent financing. 35. The specific results of CTF support in the STP subsector, in terms of GHG emission reduction and replication potential, are summarized in Table 2. Table 2. Results Indicators for the CSP Subsector Indicators Baseline Investment Program Results Installed Grid-Connected Solar Thermal 0 (2009) 100 MW e of new solar capacity Power Capacity in South Africa Estimated annual GHG emission 0 (2009) 0.45 MT CO 2e /year reductions Rapid replication potential towards Govt s goal of 4 % renewable energy power production by (2009) 100MW new STP plants per year for four years yields 2,064 GWh annual production by 2013 Source: Eskom and Clean Investment Planning Team, The additionalities of the STP component, compared to business as usual, are (a) the start-up of a pipeline of large-scale renewable power generation facilities; and (b) the development of a realistic alternative to coal power plants for base load capacity. Once the STP technology has been proven in actual operation and benchmarks for cost and performance have been established, the new technology learning curve together with appropriate policies and enabling frameworks should result in rapid scale-up. This is in contrast to the business-as-usual scenario, where the obstacles of high first cost and perceived risk act together to delay development of this renewable power technology. 37. The STP component will also stimulate private sector development. The recent establishment of renewable energy feed-in tariffs (REFIT) by NERSA has generated significant interest from the private sector for grid-tied solar independent power production in South Africa. NERSA s initial set of tariffs includes a tariff specifically for concentrating solar power with storage capacity. The regulator is also developing suitable tariffs for a wider range of solar technologies (photovoltaic and thermal, concentrating and non-concentrating and with/without 12

23 storage). Both international and domestic solar power developers are targeting this opportunity, with plans to develop projects using a range of technologies including power tower, trough, concentrating photovoltaic (PV), and tracking PV. 4.2 Utility-Scale Wind Power Development 38. Despite a slow beginning, wind power development in South Africa is entering a period of potentially rapid growth. Although current wind capacity consists of only a few small facilities (e.g., Darling Wind Power Project at 5.2 MW and the Eskom Klipheuwel test station at 3.1 MW), NERSA s recent establishment of the REFIT has generated a surge of interest by both public and private entities. The allowable feed-in tariff for wind power of 1.25 Rand/kWh is expected to be a sufficient incentive to attract private sector investment. As a result, a number of potential wind power developers have been re-evaluating old sites and developing new sites. However, considerable obstacles remain for public and private sector-led wind power development. The major constraints are include: (a) financing of project developments costs (e.g., site prospecting, wind studies, site acquisition, environmental assessments, and approvals); (b) agreement on bankable off-taker arrangements; (c) grid connection; and (d) financing of the network infrastructure needed to connect remote wind power sites to the grid. 39. The major barriers to scaling-up utility-scale wind power in South Africa include: (a) high costs relative to coal-fired production; (b) the inability to provide base load power due to output intermittency; and (c) incremental transmission costs to connect isolated wind power sites to the grid. Taking into account the lower fuel costs for wind power, the production cost gap between a new super-critical coal-fired power plant and a typical wind farm is still about 0.7 Rand/kWh. 40. The Government s near-term goals for renewable energy (e.g., 10,000 GWh by 2013) can only be met through accelerated renewable energy project development by both the public and private sector. In the public sector, Eskom has for many years been a leader in wind power development for South Africa, through its Klipheuwel test station and, more recently, its proposed Western Cape Province Wind Energy Facility. This facility, located 160 km north of Cape Town, near the town of Skaapvlei, has the potential to accommodate up to 200 MW of wind capacity. 41. A priority activity for this subsector is development of Phase 1 of the Western Cape Province Wind Energy Facility, consisting of a 100 MW wind farm comprising MW (Class 2A) wind turbines. The project is fully scoped and specified, and an environmental impact assessment (EIA) has already been completed and provincial approvals issued. The site has a moderate wind resource, which means a load factor of percent is likely. The site is near a 66 kv sub-transmission line with sufficient capacity to evacuate the power. Cumulative emissions savings from Phase 1 of the Western Cape Wind Energy Facility, based on an annual output of 271 GWh, would be 5 million tons of CO 2 over the 20-year life of the plant. 42. The Western Cape facility, together with new transmission capacity to export power from this and other locations, would act as a flagship to the sector and make it a good candidate for 13

24 CTF concessional lending. Eskom investments in expanding transmission capacity to the key regions of potential wind power development would catalyze substantial private sector investment under the REFIT program, making this also a good target for CTF support. The CTF funds could be used to partially finance the Western Cape project, thus reducing the production cost differential compared to coal; to provide contingent financing in the form of a performance guarantee; and to finance transmission additions dedicated to serving wind power development. 43. In the private sector, NERSA s establishment of the REFIT has generated significant interest, and at least 1000 MW of capacity are currently under varying stages of development. The pioneer projects will, however, face significant challenges in (a) negotiating bankable power purchase agreements with a designated single buyer; (b) ensuring grid connection and sufficient transmission capacity provision by Eskom; and (c) the learning processes involved in local lenders and contractors engaging in wind development for the first time. In addition to the public sector application of CTF funds to ensure Eskom s provision of sufficient transmission capacity, there will be a need for private sector a funding support through the International Finance Corporation (IFC) and the African Development Bank (AfDB), to overcome the additional costs faced by the pioneer projects and ensure sufficient returns for the additional risks taken by the developers of these projects. 44. The replication and scalability potential for wind power in South Africa is considerable. Although estimates of the economic wind power potential vary, a consensus value seems to be 10,000 GW. Considering that only 20 MW of utility-scale wind power is installed at present, the replication and scalability potential is very large. 45. The environmental, social, and economic co-benefits of wind power parallel those of grid-connected solar thermal power. First, the substitution of wind electricity for coal- fired electricity will reduce the NO X, SO X and particulates emission of coal-fired power production. Social and economic co-benefits go hand-in-hand with wind power development, as fabrication of components and construction of wind projects will create jobs and promote local development, especially in isolated areas where the wind power regime is favorable and job opportunities are limited. As a national wind power industry develops, there will also be economic benefits and jobs creation for small and medium wind power enterprises and associated suppliers and manufacturers. 46. The expected results from CTF-supported wind power development, in terms of GHG reductions and replication potential, are summarized in Table 3. Table 3. Results Indicators for the Wind Power Sub-sector Indicators Baseline Investment Program Results Installed Wind Power Capacity in South Africa 20 MW (2009) 200 MW of new wind power capacity (100MW public, 100MW private) Estimated annual GHG emissions 0.04 Mt CO2 e (2009 est.) 0.50 MT CO2 e per year reductions Rapid replication potential towards Govt s goal of 4% renewable energy power production (e.g., 10,000 GWh) by 44 GWh (2009 est.) 10 total new 100 MW wind farms would produce 2,700 GWh annual output 14