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WATCH | COP26: Turning the tide

Episode 3 of Climate Conversations on Business Watch with Michael Avery. 

 

An eight-part video series in the lead-up to COP26 to discuss whether we’re turning the tide on climate change. 

 

This week Michael chats to:

  • Zaheer Fakir, Chief Policy Adviser: International Relations and Governance in the Department of Environmental Affairs and lead co-ordinator for finance for the African Group of Negotiators on Climate Change,
  • John Wade-Smith, Head of Climate Change and Energy at the British High Commission, and
  • Martin Meyer Head of Power and Infrastructure Finance, Investec. 

 

Episode 3 of Climate Conversations on Business Watch with Michael Avery. 

 

An eight-part video series in the lead-up to COP26 to discuss whether we’re turning the tide on climate change. 

 

This week Michael chats to:

  • Zaheer Fakir, Chief Policy Adviser: International Relations and Governance in the Department of Environmental Affairs and lead co-ordinator for finance for the African Group of Negotiators on Climate Change,
  • John Wade-Smith, Head of Climate Change and Energy at the British High Commission, and
  • Martin Meyer Head of Power and Infrastructure Finance, Investec. 

 

Scroll to the areas that interest you

  • MA: Michael Avery – TV and radio personality and Business Watch host on Business Day TV
  • ZF: Zaheer Fakir – Chief Policy Adviser: International Relations and Governance in the Department of Environmental Affairs
  • JWS: John Wade-Smith –  Head of Climate Change and Energy at the British High Commission 
  • MM: Martin Meyer – Head of Power and Infrastructure Finance, Investec 
  • 00:00 – Introduction

    MA: Welcome to the show, you're watching Climate Conversations on Business Watch with me, Michael Avery as we build up to COP26 and discussing whether we're turning the tide on climate change, and it's brought to you by Investec.

    Now so far we've spoken to Environmental Affairs Minister Barbara Creecy, about what the overall focus is for the South African government heading into the so-called Super COP.

    We've debated the race to net zero and whether the science is congruent with the promises and the potential for greenwashing.

    And today we're zooming into one of the most crucial elements of the discussions, the climate finance fight and I say a fight because so far developing countries have been sold short of their annual promise of $100 billion in climate funding from developed countries.

    South Africa has updated its NDCs with greater ambition but as the President of South Africa mentioned in his Monday missive, where we get to in this range really depends on the support we get for our transition.

    Increased ambition cannot be achieved, without the support from the more developed economies living up to the promises that they've made in the past to provide financial support to developing economies.

    And just in the last few days, we've seen actions by developed country members of the Green Climate Fund the world's largest climate fund dedicated to helping developing countries take action on climate change, criticised for undermining the Paris Agreement specifically, the nationally determined country-owned pathways in favour of unilateral top-down imposition of conditions to access.

     

  • 01:47 - Public and private finance needed

    MA: To talk about the climate finance fight in part three of this eight-week series, it's a great pleasure to welcome Zaheer Fakir who is Chief Policy Adviser International Relations and Governance at the Department of Environmental Affairs and lead coordinator for finance for the African group of negotiators on climate change he's at the UN Climate offices in Bonn.

    We are also joined by Martin Meyer, Head of Power and Infrastructure Finance at Investec and John Wade-Smith, Head of Climate Change and Energy at the British High Commission. Zaheer welcome, and thanks for joining. Why is this year's COP so important from a climate finance perspective?

    ZF: Thank you very much and thank you very much for having me on your show. I think if you look at the motto that we have for this COP two words come to mind.

    One is ambition and one is progression. We're talking about ambition in the sense of enhancing the mitigation work, we're talking about maintaining or saving the 1.5 degree, we're talking about scaling up adaptation, the reality is that none of these are achievable if we do not have the means of implementation in place.

    And that means of implementation is finance, technology, and capacity building and for the love of a better word, and excuse the use of the language, finance is what fuels the ambition, be it in mitigation and adaptation.

    And in the absence of that finance, all the declarations, all the agreements that we have, is not going to get us to achieve those ambitions that we set out for ourselves.

    MA: John, from your vantage point, why do you see this as such a critical conversation around COP26, and particularly the finance component?

    JWS: I think Zaheer has made it very clear. I mean, we've set out from the moment we sort of assumed the designate presidency, that this needed to be ambitious we need to demonstrate in Glasgow that we, the globe, has made the transition and has bought into what we signed up to in Paris in 2015.

    And this is a single point in time to demonstrate that that transition process is underway. Underpinning that as Zaheer says is mitigation ambition, is adaptation ambition.

    Both need to be driven by finance. And we've been very clear throughout the whole thing. In fact just last week, our COP President gave a sort of final last speech before COP, again pointing out the fact that the 100 billion is a totemic figure. 

    It's what we have signed up to and it's absolutely for us imperative we meet that in order to ensure the trust which is essential for taking forward the wider negotiation process is secured.

    And so for us, it's highly important and you will have seen that the UK early on doubled its own contribution to climate finance.

    And we've been putting a lot of pressure on the G7, who've all signed up to meeting 100 billion. And you know, over the last few months, we've got a number of welcome increases from the EU, predominantly from the US and others.

    We've still got more work to do, and we're determined to try and bring it in, in time for COP, but public finance is part of the issue.

    The broader issue is also about how to unlock the trillions in private finance that need to fuel the transition needed.

     

  • 05:12 - Structuring financial vehicles and products to support clean energy transition

    MA: Absolutely. And not to also crowd out potential private investors at the same time Boris Johnson recently reiterating that mantra I think of coals, cash, cars and trees and that cash component being that 100 billion.

    Martin if we look as part of the journey to net-zero there is clearly a strategy from Eskom to move away from fossil fuel-based power and we've seen the CEO Andre de Ruyter commit to that and into renewable energy.

    What role is Investec playing and speaking of the role of private capital here that John referred to in enabling this transition?

    MM: Thanks Michael and thanks for having me on your show. And as you rightly say, I mean Eskom are in the process of decarbonizing, they have a plan to be at net-zero by 2050.

    As part of this plan, they need to obviously decommission their coal-fired plants and that comes with replacing them with renewable energy.

    If you look at what Eskom has achieved to date in terms of their renewable energy power program they have procured in excess of 6000 megawatts of renewable power and bid window five is coming.

    They are the adjudication is in process, we expecting bids at the end of October, hopefully. So Eskom has achieved a fair amount of transition already and going forward, they're going to need to roll out between 6 and 10 gigawatts of renewable power in order for them to transition away from coal.

    When you look at how Investec has been involved, we've been involved with the rollout of REIPPP from the beginning. So rounds one through four, Investec bought or have developed a portfolio of projects.

    We were successful in one of the previous rounds on a wind project, so we have equity, we've invested equity into a wind power plant that is selling power into Eskom.

    So we have equity we have funded BEE equity requirements to each of these projects requires BEE equity so we have helped fund BEE equity and we've clearly provided senior debt which is a must for all of these projects.

    In addition, we provide ancillary banking services we do some of the hedges which are required interest rate and foreign currency hedges so really across the value chain.

    Going forward, we still have developments that we are in the process of developing so we will look to invest further equity into this rollout. We have supported various bidders in round five so waiting for those bids and we'll hopefully be able to get some debt exposure into round five.

    And look, we'll continue to support this program as Eskom rolls out and looks to transition to net zero.

     

  • 08:16 - SA is between a rock and a hard place when it comes to accessing finance to transition

    MA: In fact, we can't roll it out fast enough at this stage as South Africa continues to grapple with stage one and two loadshedding.

    It was suspended this morning, but it was a stark reminder of some of the challenges in South Africa as we do transition, and we know full well what the energy minister has said about developed countries trying to impose conditionality upon the transition.

    But Zaheer what do you from your vantage point see as some of the sticking points around these climate finance negotiations?

    ZF: Okay, I think one clear point that I don't need to restate it's been stated out there is that the 100 billion has not been achieved.

    The OECD reports etc. have already indicated that we are not likely to achieve that. But beyond that, I think some of the challenges that we face as a developing country, one is the core principle of the common but differentiated responsibility element that is being ignored completely.

    The other issue around access. We are finding that there's differentiation now being made amongst countries in terms of income levels. So South Africa being classified as a middle-income country has profound impacts in terms of our access to finance and access to the concessionality that is out there.

    You finding also that the unilateral actions that are being taken by individual countries in the GCF, we've had a problem with the reaccreditation of the DBSA.

    The DBSA is a key partner for South Africa in terms of access to Green Climate Fund funding, but not just nearly the access part of it, because that's the kind of funding that we use in order to leverage private finance.

    It's the kind of funding that takes on first loss that allows us to de-risk, etc. and if we are having problems in having them accredited, that means there's no access through those institutions.

    The third area that we're looking at, and this is a new emerging area is this whole notion of alignment with the Paris Agreement and particularly the concept of Article 21c, which states around making financial flows consistent with the pathway towards low carbon and climate resilience.

    What you're finding is that there is a kind of disadvantage to countries like South Africa, which has a fairly high level of, let's say, for institutions like Eskom coal on their balance sheets, and you finding that private institutions or financial institutions are reluctant to provide financing to Eskom.

    Purely for the fact that they do have this high level of fossil fuels on their balance sheet. Or when you talk about the issue of disclosure, that they do have high climate risk, and it is resulting in a double-edged sword.

    In one sense, you want to leverage private finance, but on the other side, you're prevented because of the level of stranded assets that you do have on your balance sheet.

    And so the challenge becomes: how do you finance the transition? If you're not having access to the finance to shift away from, let's say, the dirty stuff into the clean stuff, and if you're not having that preliminary concessional finance, you're then subject to unscrupulous financing.

    And knowing that, you find that that results in a lot of debt stress exacerbating debt, because the terms and conditions by which they come in are really not favourable to a country.

    And so these are some of the challenges that we are actually facing these days.

  • 11:55 - Shifting the entire financial system towards net-zero target

    MA: And John what are your thoughts on those challenges because surely, it's not in the global interest if you place countries like South Africa in that position.

    A country that has already indicated through very ambitious NDCs it wants to transition away but is already finding it very difficult due to historical reliance on coal, to raise funding.

    There is surely a need now for developed countries to come to the party and just given that this is a finance COP, do you think our ambitions around signing a South African Just Transition deal with decarbonising electricity is realistic as a first phase?

    JWS: You know I think I hear a lot of what Zaheer says and I empathize and sympathize with much of what he says about the access to cash.

    A couple of things on GCF point- it's on the positive side it needs to be noted that in the last board meeting, $1.2 billion were allocated, which brings up this year around $3 billion. 

    So the GCF is only one vehicle for the flow of money. And some of the challenges that come from the common differentiated responsibilities as Zaheer set out around the importance of shifting the entire financial global financial system towards a net-zero target.

    What does that actually mean. And I think it's really important that, from our perspective, we recognize that the Paris Agreement, has us aiming for below 2 degrees and keeping 1.5 degrees alive.

    That 1.5 degrees is incredibly important for Africa because Africa is the place that's going to be the most at risk from any increase beyond 1.5 degrees and for that, that requires the ambition around net-zero.

    So that's why we're trying to sort of shift and support all institutions moving towards it so that the flow of funds will come.

    In terms of South Africa and the NDC and the Just Transition transaction, it has been well recognized that South Africa's NDC is ambitious and very welcome and puts it once again in a sort of the global leadership stakes in terms of the NDC response.

    And there is an interest, a growing international interest in trying to explore how we can support countries like South Africa with an ambitious, decarbonisation process.

    And you will have seen that we, the UK, led a group of climate envoys just a couple of weeks ago, to start having exploratory discussions to try and address a lot of the issues that Zaheer's pointed out about how might there be some kind of package which can help bring South Africa's ambition to light.

    This includes some of the challenges around Eskom. So I hear exactly what Zaheer says but it's really important that we do shift the financial infrastructure, to be driving ambition.

    We need to see if we're going to have long term security. And in terms of South Africa, these conversations around the Just Energy Transition are continuing, which is very pleasing. 

     

  • 14:59 - This is a once-off opportunity to make a tangible difference to global emissions profile

    MA: And talking about the climate envoys I just want to get your sense of how that visit went. Because the climate envoys did tell us that in order for us to have a deal, we need certainty.

    We've got a more ambitious NDC that sort of ticked that off.

    We've got government approval now for the Eskom JET financing facility that was certainly done. It's had the highest approval from the cabinet from the ANC Lekgotla. 

    If you look at the President's letter on Monday. Now apparently the envoys are quibbling around the Eskom debt issue, so it does look like the shifting of the goalposts are starting to annoy some of the key actors here in South Africa.

    JWS: I don't think this should be a goalpost.

    I mean, I think that the answer to this is highly complex in terms of what exactly are we supporting in South Africa because Eskom is part of it.

    But the Just Transition, which lies at the heart of the challenge in South Africa is much broader than that.

    The conversation has expanded to include green hydrogen and electric vehicles as well.

    So establishing exactly what we're supporting. And then in how you structure a facility which brings on board a number of bilateral countries, international development institutions as well.

    It's going to be tricky. It's a complex process and it's going to require time to structure.

    So I think that initially, it's about establishing exactly where we're coming from on both sides so we can then get down to the technical aspects about how you go and structure some kind of financial facility that might support accelerated decommissioning and decarbonisation in South Africa.

    So I think there's a very positive aspect to this. The conversation is still coming on.

    It's been led, I think, by the UK with the US, the French, the Germans and the EU. But there are many others who are very keen to be part of this process as well.

    It's about harnessing that enthusiasm more beyond the five, ten years, to try and get something that's going to be meaningful in South Africa.

    MA: John just to stay on that for a second longer -  to get your impressions following the meeting. You visited Komati as well.

    Is there a sense, amongst that group, that South Africa could be used here as a proof of concept to be applied elsewhere around the developing world?

    And indeed, even with middle income and higher developed countries like Poland for example, who are still very heavily reliant on coal?

    JWS: I think possibly yes.

    What they really are looking at is a really exciting potential to be able to find a way of supporting significant decarbonisation in an emerging economy.

    And I think every country will require different flavours in terms of exactly what will work.

    But certainly, it is I think, widely shared that there is a moment in time now where we can try and work towards something that is going to make a tangible difference, not just South Africa's transition, but actually globally in terms of the emission profile that we're trying to address globally.

  • 17:57 - Huge potential for private sector to reimagine finance with new threshold announcement

    MA: Martin I want to bring you back into the private sector conversation and you already mentioned the role that Investec has played through the various REIPPP rounds.

    Is Investec able to assist in the financing of power plants that then sell their power into the private sector because that seems to be a space that's opening up now as well?

    MM: Yes, Michael I mean that's right.

    If you look at the corporate or the private sector space they've been looking to procure green energy for some time.

    I think up to date, they really have been hamstrung in terms of the ability due to the cap on the generating licenses to date, the gen licenses for anything over one megawatt have been needed in order for corporates to generate their own power.

    So as part of their decarbonisation drive, this didn't move the needle. When you look at intensive energy users, they use significantly more than one megawatt of power, so they needed a bigger number.

    With the President announcing earlier this year that that cap has been increased to 100 megawatts this is clearly a game-changer and the private sector now obviously gearing up to buy that power from Eskom.

    You seeing a lot of RFPs come to market from intensive energy users, which is sort of similar to a REIPPP type process where they go to the market to procure the power.

    And this gives a great opportunity to buy green power as the pressure for corporates to decarbonize intensifies.

    In terms of how Investec are gearing ourselves up, we've been looking at this for some time. It depends on how the corporates look to procure this power.

    They can build it on their own balance sheets, in other words, they build it on their own sites, or they build it themselves.

    In which case you will see banks and Investec, in particular, looking to fund the corporate themselves on the back of their balance sheet.

    Alternatively, they go to third parties to produce this power for them, and they then buy that power through a weaning agreement on the Eskom grid.

    So that requires a more innovative funding structure. These PPAs are typically sort of 20 years out.

    The life of these assets is 30 years, so you need to structure debt products that take that long tenure into account and that's sometimes where the private sector struggles.

    Getting those long tenures in place. We are in the process of structuring debt products that get you those long tenures.

    With those long tenures come a reduction in tariffs, which makes this power competitive. As part of this structuring, we do speak to the climate finance providers.

    We speak to the DBSA and the DFIs and as Zaheer alluded to earlier, they have products where they have credit enhancements.

    They have first loss type facilities, so we are chatting to them to come up with innovative products in terms of these long tenure deals.

     

  • 21:04 - Additional R7,5bn coming to Eskom for JET transition

    MA: So very important that the issues around the DBSA getting access to the Green Climate Fund are resolved. Zaheer what are South Africa's finance needs and what are we currently doing as a country to ensure that we enhance our access to climate finance?

    ZF: Well, Michael, I mean, just speaking on the Eskom energy transition program- it's estimated that they would need for the period of the next 10 years, something in the range of around $27 billion just to finance that.

    Currently, when we did our assessment of the financial or international support coming into South Africa, it's running at around $2 billion a year.

    And our NDC articulates that by 2030, we need to be at a point at around $8 billion.

    That is just the international support. Currently, if we look at our investments, the investments are running on the basis of let's say, co-financing or leveraging at the ratios of around four to one.

    So with the 8 billion, if you're looking at a four ratio, that's another what 32, so you're looking at an investment on an annual basis of anything over $40 billion injection into the transition in South Africa.

    But Michael, let me give you a scoop.

    I sit on many of the fund’s boards. I was in a board meeting on the Climate Investment Funds which is a fund situated in the World Bank financing clean technology, etc.

    One of the new programs that we agreed to and in which the G7 provided some injection of capital into is the Accelerating Coal Transition program.

    The board took a decision in which four countries have been selected to submit investment plans to be able to access up to 500 million dollars.

    14 countries submitted expressions of interest and I'm glad to say South Africa ranked number one amongst them. So South Africa, India, Indonesia, and the Philippines have been selected to submit an investment plan.

    So we'll be working closely with Mandy at Eskom to submit an investment plan so there's already an injection of $500 million coming into the Just Energy transition program of Eskom.

    One should also note that that is blended finance so linked to that 500 would be blended support coming from multilateral development banks.

    In our case, we'll be talking to the World Bank and the African Development Bank around that.

    The important thing of that is that allows us then to on the strength of that, to start engaging with people like Investec and other private financiers to look at how we then blend more finance into that program.

    So that's one positive development. 

    The other one is the recent announcement by PIMCO of providing 200 million to the DBSA.

    It's a kind of a debt servicing facility to free up debt servicing financing at DBSA to be engaged into renewables.

    That's an interesting development because that looks at creating some lessons for the new emerging areas of debt swaps and debt for climate swaps.

    So there's a lot of things happening.

    My message to John and the others... you guys in the envoys better get your act together because we are moving ahead, way faster than what you guys can do.

    And maybe we'll be talking with the guys at Investec to see how we can scale up this engagement. Thanks very much, Michael.

    MA: Zaheer thank you.

    Unfortunately, that's all the time we have for just as we're really getting stuck into the meat of it.

    It's going to be a very interesting COP26, the finance COP.

    That was Zaheer Fakir, Chief Policy Advisor International Relations and Governance in the Department of Environmental Affairs and lead coordinator for finance for the African group of negotiators on climate change with that scoop that there is another seven and a half billion Rand basically flowing into that Eskom JET transaction.

    John Wade-Smith, Head of Climate Change and Energy at the British High Commission-  thank you very much for joining us.

    Along with Martin Meyer, Head of Power and Infrastructure Finance at Investec.

    You've been watching the Climate Conversations on Business Watch with me Michael Avery, as always brought to you by Investec.

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