Eskom: The World Bank’s Coal Power Support Program

$3.75B Loan Highlights Concerns About Energy Development in South Africa

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By Smita Nakhooda, WRI

The prospect of a $3.75 billion World Bank loan to support the Medupi Supercritical coal plant in South Africa has raised questions about the future of development assistance in a warming world.

The coal plant, part of the national South African utility Eskom’s program to expand generation capacity, is expected to provide 4,800 MW of electricity. Construction of the plant has already begun, and contracts for key components have been signed. Yet Eskom’s longer-term electricity expansion program may have problematic implications for environmentally and socially sustainable development in South Africa.

There are trade-offs between increasing South Africa’s electricity generation capacity and reducing its greenhouse gas emissions (as laid out in the country’s national Long-Term Mitigation Scenarios) that must be reconciled. Electricity planning processes to date, however, have been neither transparent nor inclusive.

The assumptions that coal is the most viable long-term option for South Africa need to be revisited through open, fact-based debate on all available energy options.

An Urgent Need for Energy

South Africa has been in the middle of an electricity crisis since 2008: Demand significantly exceeds supply, in a marked turn of events for a country that was once awash in cheap electricity. Major investments in new electricity generation have not been made since the 1980s.

The Medupi coal plant for which World Bank funding is sought was originally one of more than five large-scale coal plants that Eskom proposed to build as part of a large-capacity expansion program to stop the gap. Eskom and the Department of Energy proposed the core elements of this build program in a draft 20-year Integrated Resource Plan (IRP) for the electricity sector in September 2009. At the end of last year, the government approved an interim five-year IRP plan, pending consultations on a longer-term plan for the sector, recognizing the need to address the longer-term implications of electricity development.

Questioning Conventional Assumptions

The full costs and benefits of the options for meeting near- and long-term energy needs must be considered more carefully than in the past.

Eskom’s projections of 80,000 MW of future demand for electricity by 2028 are debatable. Historically, electricity planners — and Eskom in particular — have been overly optimistic about these projections to justify new investments in infrastructure. Financing a massive capital expansion program is certainly not cheap in the immediate term: After Eskom originally requested a 45% per year increase in the price of electricity over three years, the National Energy Regulator of South Africa allowed it an increase of approximately 25% per year between 2010 and 2013.

All base-load electricity options pose risks, and may have hidden costs. The draft IRP emphasized these risks for low carbon options such as renewable energy, without acknowledging the risks of continued dependence on coal fired power. There is limited transparency about the terms on which Eskom contracts coal, and the costs of coal have been escalating. Interruptions in coal supply caused by transport failures and weather events have shown that coal plants are also not always reliable.

In addition, the operation of large coal fired power plants is enormously water intensive in a country where water scarcity is a pressing environmental challenge. Acid drainage from mining already poisons many of the country’s water systems, and restoring water ecosystems is costly. When the implications of climate change are also factored in, the viability of conventional coal in the long term looks far less certain.

While the importance of reliable electricity supplies to support economic development and reduce poverty has been central to the rationale for the Eskom program, there has been little emphasis to date on how to meet the enduring challenge of extending access to electricity to the 30% of South Africans who still lack it.

Difficult Decisions for the World Bank

A broad based coalition of local civil society groups within South Africa and global NGOs are voicing their opposition to the World Bank’s support for the Medupi power plant. They have called in particular on the U.S. government, the largest shareholder of the World Bank, to withhold support for the project, referencing the government’s new policies which suggest that coal should only be supported as an option of last resort.

The role of the World Bank in the energy sector has been complex and controversial. It has a history of financing mega-infrastructure projects that raise significant environmental and social risks, and supporting private sector oriented reforms that have delivered limited social or environmental benefits. Attention to environmental considerations in its energy sector lending, particularly climate change, has been uneven.

At the same time, the Bank is interested in financing climate change activities in developing countries, and positioning itself as a lead low-carbon growth support agency. The US$6.3 billion Climate Investment Funds (CIFs) that it administers on behalf of the Multilateral Development Banks represent a pilot effort to explore this space.

Last year, the Clean Technology Fund of the CIFs committed US$500 million to support renewable energy and energy efficiency in South Africa. The concentrating solar thermal plant and the wind farm included in the 2009 electricity IRP will be largely financed by the Multilateral Development Banks. These will be the first large-scale renewable energy facilities to come onto South Africa’s grid.

The World Bank also has supported ongoing technical assistance efforts to support renewable energy and energy efficiency programs, and is presently financing the South Africa Department of Energy to develop a white paper that will shape future policy on renewable energy.

A Need for Transparency and Debate

The underlying problem is that there has been little transparency or public debate of the assumptions that underpin long-term plans for how to meet energy needs within South Africa. While the draft IRP developed by Eskom and the Department of Energy is referenced extensively in the report of the World Bank expert panel, it has never been officially publicly disclosed in South Africa, though it was leaked to the media earlier this year.

A bigger problem is that the electricity IRP should be informed by an Integrated Energy Plan that sets a macro framework for the entire energy sector in South Africa. Public participation in the development of the Energy Plan is required in the 2008 National Energy Act. So far, no Integrated Energy Plan has been developed. Transparency and public participation are especially crucial when such long term investments that affect public interests are being made, and consumers and taxpayers pay the bills.

The realities of climate change require the World Bank to encourage countries to seriously consider every possible alternative to carbon-intensive coal power as they decide how to meet their energy needs. In the context of the Eskom Support Program, the World Bank must recognize the limitations of the decision-making processes to date and support improvements in governance.

Policy and regulatory frameworks that better manage the environmental and social externalities of conventional energy technologies are needed. The capacity of institutions to weigh the options and implement effective low carbon programs must be supported. Creative approaches to enhance technical capacity as well as accountability for impact are also necessary.

If the World Bank is to support developing countries to transition to a sustainable energy future, and to be a credible actor in channeling climate finance, what role can and should it play in supporting conventional technologies? These are difficult decisions that all its shareholders will need to weigh carefully.

(Reprinted with permission from the World Resources Institute. This article builds on the research findings of the Electricity Governance Initiative South Africa Assessment, coordinated by Idasa, in collaboration with a wide cross section of civil society and research institutions in South Africa including WWF-South Africa, the International Labour Research Group, Earthlife Africa, the Energy Research Center at the University of Cape Town, the Democratic Governance and Rights Unit of the Faculty of Law of the University of Cape Town, Sustainable Energy Africa, and the Green Connection.)

See also:

World Bank’s Massive Fossil Lending Undermines Its New Climate Funds

World Bank Puts Hydropower Back Into Favor, NGOs Do Not

Western Institutions Bankrolling Dirty Power in Developing Countries