Overview and Insights from South Africa’s Key Climate Initiatives

Scale-up and Replication of Climate Finance Interventions Session

OECD / IEA Climate Change Expert Group Global Forum

Paris, France, 19th March 2014

Sharlin Hemraj | National Treasury | South Africa

Outline of Presentation

• Introduction – Policy Context• Economic Rationale for Government Intervention – Addressing

market failures • Overview of policy instruments to support sustainable production and

consumption patterns – Bridging the financing gap – unlocking climate investments

• Key Programmes:– Renewable Energy Independent Power Producers Programme – Green Fund – Cities Support Programme – Other – International Climate Finance and Private Sector Initiatives

• Concluding Remarks

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Introduction – Policy Context

• South Africa has developed important policy frameworks and strategies that seek to address climate change and ensure a coordinated, consistent government policy response. These include:

– National Climate Change Response Policy: • reduce emissions by 34 per cent by 2020 and 42 per cent by 2025 relative to a

business as usual emissions trajectory.

– National Strategy for Sustainable Development and Action Plan which identifies 5 strategic priorities:

• Enhancing systems for integrated planning and implementation • Sustaining our ecosystems and using natural resources efficiently• Towards a green economy• Building sustainable communities • Responding effectively to climate change

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• Financing National Climate Change Response Policy and long term funding framework for climate change:– Mainstream climate change response into the fiscal and budgetary

process and so integrate the climate change response programmes at national, provincial and local government and at development finance institutions and state-owned entities.

• Near Term Priority Flagship Programmes for:– Climate Change Response Public Works – Water Conservation and Demand Management – Renewable Energy – Energy Efficiency and Demand Side Management– Transport – Waste Management – Carbon Capture and Storage– Adaptation Research

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National Climate Change Response White Paper: Finance and Flagship Programmes

Economic Rationale for Government Intervention

ENVIRONMENTALLY-RELATED MARKET FAILURES:

• Provision of public goods: Non rival and non-excludable in consumption. • Negative externalities: Occurs when an individuals action has an impact on

others and the costs of these impacts are not reflected in the price of a good or service. Can result in resource under-pricing and therefore overconsumption.

• Information asymmetry: Occurs when during a transaction, one party has better information than the other or information is costly to obtain. In new, rapidly changing markets, such as for green technologies, some participants will lag behind current information.

• Research, development and technology innovation: may not be possible for a firm to capture the full benefits of an innovation as the information can be readily passed on at a minimal cost.

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Rationale for Environmental / Climate Finance: Technology-Related Market Failures (Source: World Bank)

• Inventions and discoveries have public good characteristics. Firms under-invest in research and development because of the fear that their competitors will benefit.

• Public promotion of new technologies, beyond support for research, can be justified by consideration of dynamic increasing returns generated by learning-by-doing, learning-by-using and network externalities. Successful innovation is a long, arduous process. – The average period for taking a new energy technology to market – to traverse the

“valley of death” as it is often called – is 20 to 30 years (Lee, Iliev and Preston, 2009). In such an environment, early-movers generate spill-over effects which are of benefit to society but cannot be privately appropriated.

• In the case of renewable energy, policy risk is unavoidable. – Technology-based policies can help reduce policy risk by providing support upfront

(e.g., through capital subsidies) rather than over time and/or by embedding support that is provided over time into legally binding contracts (e.g. through feed-in tariffs).

• Capital market failures. A combination of large upfront costs and high risk profiles can make renewable energy demonstration projects unsuitable for both venture capital and commercial financing and therefore leave them with inadequate market financing.

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Policy Instruments to Support Sustainable Development – Sustainable production and consumption patterns Regulatory

Instruments Economic / Market

Based Instruments

Research and

education instruments

Cooperation instruments

Information instruments

Norms and standards

Environmental taxes Research and development

Technology transfer

Consumer advice services

Environmental liability

Fees and user charges

Education and training

Voluntary agreements

Sustainability reporting

Environmental control and enforcement

Removing environmentally harmful subsidies (perverse incentives)

Environmental quality targets and environmental monitoring

Environmental financing

Eco labelling

Subsidies Information centres

Tradable certificates / permits

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Bridging the financing gap between carbon intensive and low carbon, environmentally cleaner technologies

• Environmentally – related taxes / user charges that internalise externalities and also provides a revenue source.

• Subsidies for the provision of public goods - critical infrastructure in the energy, transport, water sectors (high upfront capital costs)

• Subsidies to encourage research and development of low carbon, environmentally cleaner technologies and promoting cleaner production practices

• Tax incentives for R&D and low carbon capital investments • Environmental financing policies to derisk projects – guarantees,

concessional loans• Public private partnerships for pilot demonstration plants and facilities • Accessing carbon market finance – CDM and new market mechanisms • International funding – Green Climate Fund, other environmentally related

funding accessible through the Global Environment Facility, Strategic Climate Change Fund, Bilateral and multilateral funding

Multiple Barriers, Multiple Stakeholders, Multiple Instruments!

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Current Climate Change and Environmentally Related Programmes

Sector Initiative

Energy • Renewable Energy Independent Power Producers Programme • Integrated national electrification programme • Energy Efficiency and Demand Side Management Programme - mainly solar

water geysers• Designated National Authority – Clean Development Mechanism • Manufacturing Competitiveness Enhancement Programme – grant for upgrading

projects to encourage energy efficiency and cleaner production practices

Transport • Public transport infrastructure and systems grant – Bus Rapid Transit Systems

Environment – natural resource management

• Working for Water – clearing alien invasive species• Working for coasts – Promotes clean-up, rehabilitation and security of coastal

environments and ecosystems• LandCare – community based programme focusing on conservation and rehabilitation

of soil, water and vegetation• Working on Fire – focuses on integrated fire management of veld and wildfires• Green Fund – grant funding to support green economy programmes

Biodiversity • Biodiversity conservation and management (South African National Parks, South African National Biodiversity Institute and Isimangaliso Wetland Park Authority)

Disaster management

• Municipal disaster grant• Provincial disaster grant (Includes allocations from Depts of Transport, Human

Settlements, COGTA)

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Renewable Energy Independent Power Producers Programme

• Objective: contribute towards security of electricity supply, emissions reduction and access to energy.

• In line with the Integrated Resource Plan of 2010, the original procurement document provided for procurement of 3725MW generation capacity in five different rounds. In 2013, the Minister of Energy determined that a further 3200MW of renewables generation capacity was to be procured.

• A feed in tariff incentive scheme was proposed. A competitive bidding approach to the mechanism was implemented via three bidding windows.

• Financial support for the programme comprises:– Cost recovery mechanism through the electricity tariff: IPP levy – Government ‘policy’ guarantee to the extent that the buyer defaults– Foreign investment – debt and equity – Subsidised clean energy programme of the Department of Energy

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Total Estimated Project Cost for All Windows

TechnologyNumber of Preferred

BidsNet Capacity (MW)

Total Project Cost (ZAR Millions)

Biomass 1.0 16.5 1 062 CSP 5.0 400.0 33 798

Landfill gas 1.0 18.0 288

Onshore wind 22.0 1 983.5 41 177

Solar photovoltaic

33.0 1 483.7 43 308

Small hydro 2.0 14.3 631

Total 64.0 3 915.9 120 263 USD 12 bill

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Source: Renewable Energy Independent Power producers team (March 2014)

Preferred Bidders – Foreign Investment (ZAR millions)

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Source: Renewable Energy Independent Power producers team (March 2014)

USD 4.4bill USD 1.56bill

 Total

Funding Foreign Portion % of Total

Debt R 26 791 R 6 718 25.1%

Equity R 17 621 R 8 884 50.4%

Total R 44 412 R 15 602  

Procurement Process

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Source: Renewable Energy Independent Power producers team (March 2014)

Contractual Arrangement

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IPP

GovernmentEskom

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Evaluation team:

• Independent reviewers

• Legal evaluation team• Bowman Gilfillan• Edward Nathan Sonnenbergs• Ledwaba Mazwai• Webber Wentzel

• Technical evaluation team• Mott Macdonald

• Financial evaluation team• EY• PWC

Evaluation Streams:

• Legal Environment• Environmental Authorization

• Legal Land• Land rights• Notarial lease registration• Proof of land use application

• Legal Commercial• Acceptance of the PPA• Project structure

• Economic Development• Contributor status level• Compliance with thresholds

• Financial• Financial proposals

• Technical

Project Evaluation Process

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REIPPP – High Level Conclusions

• Successful Implementation of the Programme due to – Sound enabling policy environment, legislative framework and

political will – cost recovery mechanism via the electricity tariff (off-budget

mechanism), policy guarantee, foreign investment (debt and equity). Crowded in private sector investment.

– long term 20 year power purchase agreements agreed – a well run, credible procurement process – effective collaboration

between the National Treasury Public Private Partnership Unit and the Department of Energy.

• Potential to expand the programme to support additional renewables capacity and to develop a dedicated renewable energy fund for small scale renewable electricity generation.

• Expansion of programme to include good quality cogeneration.

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Green Fund

• The Green Fund is implemented as a strategic programme on the budget of the Department of Environmental Affairs.

• The Fund seeks to:– Promote innovative high impact green programmes and projects– Strengthen institutional and technical capacity to mainstream green and

climate issues into the economy– Reinforce climate change response through green interventions– Build an evidence base for the expansion of the green economy– Attract additional resources to support South Africa’s green economy

development • Green fund allocated USD 80 m (USD 30m in 2012/13 and USD 50m in

2013/14), additional USD 25 mil allocated to the fund in Budget 2014• The Development Bank of South Africa is the implementing agency

of the fund and operates and reports on the objectives of the fund to the Management Committee.

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Overview of the Fund (Source: DBSA 2014)

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Green Fund

Portfolio split

Project development

(75%)

Capacity building (20%)

Research and policy

development (5%)

Instruments

Financial support

Technical assistance

Access to technical experts

Sources of funding

Fiscal budget

Public & Private sources

Technical assistance

Green Cities and Towns

Low Carbon Economy

Environmental & Natural Resource

Management

Funding windows

ACCESS : Spatial distribution and thematic (cross-sectoral) distributions

SAFEGUARDS & STANDARDS: Environmental, social, fiduciary, policy integration

MONITORING & EVALUATON FRAMEWORKS: 3 levels (fund, portfolio, project), incl. independent reviews

STRATEGIC INSIGHTS: MANCOM, Government Advisory Panel, sector roundtables and other

RESOURCE MOBILISATION: Mobilise & leverage private & int’l green finance

Cri

tical

fram

ew

ork

s

Green Fund: Request for Proposals Process (Source: DBSA 2014)

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Date RFP Process

Area Submitted Approved to date

Value

2012 1st RFP Project finance (R&D)

616 22 R 591 m

2013 2nd RFP Research and Policy Development

155 16 R 36 m

Initial Market Response (DBSA: 2014)

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Picture of SA green economy landscape emerging?

Potential of the Fund and Next Steps

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• Green Fund – offers leveraging and partnering opportunity for investment by the

private sector and other finance institutions.– Provides essential learning opportunities to enable the fund to

interface with emerging global funds such as the Green Climate Fund, as the DBSA is an entity of the National Treasury and meets the necessary fiduciary standards.

• The fund is still at an early stage of implementation. Green fund currently provides grant funding with an element of cofinancing. The potential for the fund to provide loan financing and other financial instruments needs to be explored further.

• A review of the fund is underway for the first phase to further inform lessons learnt.

International and Private Climate Financing Mechanisms

• Other climate finance initiatives can also be identified.– National Implementing Entity for the Global Adaptation Fund:

South African National Biodiversity Institute – Industrial Development Corporation Energy Efficiency Fund– Climate Finance work of the National Business Initiative including

an energy efficiency facility• Currently, the development of these instruments by both the private

and public sector is largely fragmented. • Further work is envisaged to understand and review existing flows of

public finance (domestic and international) and private sector finance to climate change initiatives.

• This could support proper coordination and complementarity of efforts, evaluation of the effectiveness and impacts of these initiatives and consideration of reforms to existing initiatives (upscaling)

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Institutional Strengthening and Capacity Building: Cities Support Programme

• The role for local government in responding to climate change is recognised however, the human resoucres and institutional frameworks to enable this response is quite weak.

• The Cities Support Programme has been developed by the National Treasury in collaboration with other government departments aimed at providing strategic support to local government.

• 4 key components of the programme: – Core city governance integrated strategic, participatory planning and

financing; – Human settlements support (access to land and services);

– Public transport support (mobility and urban efficiency) and – Climate resilience and sustainability support (resilient

infrastructure and systems)

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Cities Support Programme (2)

• For the Climate resilience component, the programme seeks to – Assist cities to scale up their climate adaptation and mitigation

interventions especially to leverage available global funds and to access global experience and expertise in climate change mitigation and adaptation interventions

– Will focus on mainstreaming climate resilience issues across major infrastructure sectors managed at city level such as water and sanitation, electricity distribution, solid waste management, storm water drainage and public transport.

– Collaborative effort between the National Treasury and the Department of Environment.

• A project preparation facility will also be introduced supported by the DBSA to help cities design catalytic projects.

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Cities Support Programme (3)

• Integrated Cities Development Grant– Provides financial incentive for metropolitan municipalities to

integrate and focus their use of all available infrastructure investment and regulatory instruments to achieve more compact and efficient spatial form.

– Cities required to submit built environment performance plans to qualify for the grant

– All projects funded by sector specific infrastructure grants including urban settlements development grant, public transport infrastructure, neighbourhood development partnership grant, and the integrated national electrification programme grant must form part of a metropolitan municipality environment performance plan.

– Aims to improve the effectiveness and efficiency of local government spending

– Additional R356 million funding allocated over the 2014 MTEF period.

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Concluding remarks

• Appropriate regulatory and economic incentive instruments complemented by international and domestic financial support has an important role to play in facilitating the transition to a low carbon society and unlocking essential low carbon investments. This would help to crowd in private investment and finance.

• Multiple financing instruments may be needed for large scale climate initiatives that face multiple barriers. A programmatic rather than project based approach would help to catalyse these investments in developing countries and implement interventions at scale with greater impact.

• Implementing programmes would require institutional strengthening and capacity building. Greater collaboration between the Ministries of Finance, Environment and sector departments is needed on the financing aspects.

• Given the cross cutting nature of climate change impacts across different sectors, consideration should be given to building on existing dedicated financing mechanisms and institutions, ensure that climate aspects are considered in key programmes and explore the potential to leverage additional, innovative financial resources to enhance the effectiveness of these instruments.

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TTHANK YOU.

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Key design considerations for environmental financing mechanisms

• Expenditures should be targeted to meet environmental priorities and promote projects with large environmental benefits relative to their costs.

• Environmental Funds should :– play a catalytic role in financing, offering no more support for projects than

is necessary and adapt to changing economic conditions.– be used in conjunction with, and reinforce, other environmental policy

instruments, such as regulations or economic instruments.– develop an overall financing strategy, follow clear and explicit operating

procedures for evaluating and selecting projects, and adopt effective monitoring and evaluation practices.

– not compete with emerging financial markets but should leverage financing from private sector enterprises and financial institutions for environmental investments.

– ensure transparency and should be accountable to government, parliaments and public for their actions.

Source: OECD, 1995a

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REGULATIONS MARKET BASED INSTRUMENTS INFORMATION INSTRUMENTS

Targets Norms and standards Subsidies / Environmental Finance

Environmentally Related Taxes and Tax Incentives

 

Emissions reduction target: 34 per cent by 2020 and 42 per cent by 2025 relative to a business as usual emissions trajectory.  White Paper on Renewable Energy (2001): renewable energy target of 10 000 GWh by 2013. Energy efficiency strategy: National target to reduce energy intensity by 12 per cent by 2015 coupled with specific targets.  Biofuels industrial strategy: mandatory blending target - 2 per cent blend into national road transport fuel pool.  Integrated Resource Plan: 3 725 MW electricity from renewable sources   

Air Quality Management Act: Industrial Installations responsible for more than 0.1 per cent of total emissions for a sector will need to compile mitigation plans for approval.   South African National Building Regulations: Introduced requirements for energy usage in buildings in 2011 that is all buildings to receive at least 50 per cent of their water heating requirements from renewable sources. Also development of the South African National Standards 10400-XA Energy usage in buildings.  Measurement and Verification of Energy Savings Standard: SATS 50010

SANS 20101: Measurement of CO2 and Fuel

Consumption of Categories M1 and N1 Vehicles.

Public Transport Programme: Public Transport Infrastructure and Systems Grant and rollout of Bus rapid transit systems in municipalities  Clean Energy Programme: Designated National Authority approval of CDM projects.  Solar Water Heating Programme: target of 1 000 000 solar water heater installations by March 2015.  Climate Change and Air Quality Programme: Climate Change mitigation, adaptation, and monitoring and evaluation  Manufacturing Competitiveness Enhancement Programme: Clean Technology Upgrading Grant  Energy Efficiency and Demand Side Management: Energy Services Company model, Standard offer and Standard Product Programme of Eskom Renewable Energy Independent Power Producers Programme (feed in tariff mechanism)  Carbon Capture and Storage Programme: Led by DoE in partnership with the South African National Energy Research Institute. Green Fund: Low carbon economy funding window.  

Environmental Taxes:  Proposed carbon tax policy: R120/ton CO2e

 Development of carbon market mechanisms: Publication of the carbon market offsets paper.  Electricity generation levy of 3,5 c/kWh General fuel levy on petrol and diesel.  CO2 based emissions tax on new passenger

motor vehicles Incandescent globe tax of R3 per globe.  Tax incentives:  Energy efficiency savings tax incentive Energy efficiency-related criteria in the Industrial Production Policy incentive scheme. Tax exemption for income derived from the disposal of primary CERs generated from projects under the Clean Development Mechanism  Accelerated depreciation allowances for renewable electricity generation and biofuels production.  Research and Development Tax Incentives 

Vehicle emissions fuel economy and CO2 emissions

Labelling scheme in terms of the Standards Act 1993. Enforced by the National Regulator for Compulsory Specifications.  Energy Efficiency Standards and Appliance Labelling Programme: SANS 941 for Energy Efficiency of Electrical and Electronic Equipment.  

Enforcement, Monitoring and Evaluation Capacity: Development of GHG inventories for energy, land-use and waste related emissions and framework for reporting by industry.  

  

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