SA leads race to energy transition funding despite elevated political risks this year - Moody’s

Moody’s has flagged South Africa as a “potential flash point for political risks” in 2024. File

Moody’s has flagged South Africa as a “potential flash point for political risks” in 2024. File

Published Jan 11, 2024


Despite being described as a potential hotspot for political instability this year, South Africa stands to benefit from international financing targeted for energy transition, ratings agency Moody’s Investors Service said on Wednesday.

South Africa is among a few African countries, that include Senegal, that have signed Just Energy Transition Partnerships.

This week South Africa announced the approval of a R19 billion loan guarantee facility with the African Development Bank for its energy transition programme, with the British Commonwealth, foreign office and development office part of the partnership.

However, with elections looming this year, and analysts fearing political risks from waning popularity and support for the ruling ANC, Moody’s has flagged South Africa as a “potential flash point for political risks” in 2024.

This, however, is not expected to have an impact on the flow of funds into energy transition, with South Africa being a front runner to attract international funds being channelled towards the sector.

“Just Energy Transition Partnerships, such as those signed by South Africa and Senegal, provide an avenue to mobilise international financing toward the energy transition and offset carbon transition risks,” Moody’s said.

The ratings agency also expects South Africa to to return to growth trends in gross domestic product (GDP) after record levels of load shedding in 2023. Reforms to the energy sector will play key roles in unlocking the country’s attractiveness to private sector energy investment.

“Energy sector reforms, including debt relief for electric utility giant Eskom, and increasing the country’s renewable energy capacity, if successful, would address a long-standing constraint on economic growth.”

This would additionally provide “possible credit upsides” for South Africa, which is front placed on the continent in the global transition to low-carbon energy sources race. This comes as demand is increasing for minerals that are essential components for the energy transition.

South Africa companies such as Sibanye-Stillwater have also been investing heavily into green minerals such as lithium while platinum miners see palladium playing a key role in hybrid automobiles in the transition process to electric vehicles.

South Africa is among mineral rich African countries that include the Democratic Republic of the Congo, Mozambique and Zambia that Moody’s says hold more than 40% of global reserves of cobalt, manganese and platinum, considered key for batteries and hydrogen technologies.

According to Alex Lanferna, the general secretary for Climate Justice Coalition, funding for South Africa’s Just Energy Transition Partnership is premised on South Africa accelerating its transition to renewables.

In the last quarter of 2023, President Cyril Ramaphosa’s administration approved South Africa’s Green Hydrogen Commercialisation Strategy (GHCS) that outlines a strategic vision to position South Africa as a significant producer, user, and exporter of green hydrogen. It also provides the framework for the government to support and promote the country’s green hydrogen sector and ambitions.

Ramaphosa’s administration estimates that by 2050, the hydrogen economy could contribute 3.6% to the GDP and generate 370 000 jobs.

Green hydrogen, produced using environmentally friendly methods that split water into hydrogen and oxygen, is increasingly seen as a cleaner source of energy.

Its clean “energy carriers and derivative products are becoming increasingly important in assisting sectors that cannot decarbonise directly using renewable electricity, such as steel, petrochemicals, fertilisers, cement, and long-haul land-, sea-, and air” transportation.

South Africa is poised to be a front runner in green hydrogen production; Anglo American has already unveiled a prototype for the world’s largest hydrogen powered mine haul truck which it sees as a key step towards energy transition and decarbonisation. Other players in Africa have been focusing on lithium, wind and solar energy to shore up their energy transitions.

Regional peer Zambia, which has close trade ties with South Africa, is also a global centre of copper production, alongside Zimbabwe which has rich lithium, palladium and nickel deposits that have attracted some South African investors such as Impala Platinum, Anglo Platinum and others.

However, in Zambia and Zimbabwe, “infrastructure and governance constraints have limited the credit upside from these resource endowments” to date. This means that South Africa will attract more of the investment that may have been directed towards the region.