Replacing coal with Renewable Energy Could Pay for Itself

Jul 26, 2022

An article published by Business Day written by René Laks, the General Manager of CVE South Africa.

As temperatures in Europe are soaring to record levels, the world glimpses its climate future. With rising energy prices as result of the war in Ukraine, some EU countries have announced plans to reopen coal-fired power stations in response to Russia’s restrictions of gas flows into Europe. The continent is also buying all the liquid gas it can get, which threatens to make countries in Asia, Africa and Latin America fall back on coal. Russia’s invasion of Ukraine has created an energy crisis that is exacerbating the climate crisis: dirty energy is gaining ground; greenhouse gas emissions are rising.

Closer to home, in South Africa, business and households are experiencing the worst load shedding (rolling blackouts) since 2008. Eskom, South Africa’s utility has shed 3,084GWh in total during 2022. In comparison, these levels of planned outages were seen during the entire year of 2021.

In this contribution of CVEs South Africa’s GM René Laks , you will read that the world realises a net gain by shifting to renewable energy, and that fast-tracking Solar PV for South Africa is a no regret option.

Never let a (power) crisis go to waste

Globally and nationally, we are facing a perfect storm. Governments worldwide must seize this moment to accelerate the energy transition in the fight against climate change. Attempts to phase out coal have faltered amid fears that the transition to renewable energy would be too costly.

The good news is that it is possible from a macro-economic perspective.

Recently, the IMF published a working paper in which three leading economists argue that the switch from fossil to renewable energy will bring enormous long-term benefits to the world. Climate gain – but also economic gain. They offset the price of the energy transition against the benefits: the climate damage that is prevented.

The debate is often centred around the costs of the energy transition. Those are high, but the economic benefits of the transition are many times higher, according to the IMF. By comparing the present value of avoided emissions with the present costs of replacing coal with renewable energy, they estimate that the world can realise a net gain of USD 78 trillion by 2100 through a shift to renewable energy.

The economic benefits of a global transition to green energy are “many times greater” than its costs.

In the working paper, the three authors describe what would happen if coal-fired power generation were to be phased out from 2024.

By 2050, there should be no new greenhouse gas emissions (net zero), which is necessary to limit climate warming to 1.5 degrees. Solar and wind energy will replace coal. Such a change will cost an enormous amount of money: USD 29 trillion worldwide, more than the total GDP of the United States.

The costs consist of estimates of the large-scale investments in solar and wind energy that are required, plus compensation for the closure of the coal industry. The focus is on coal, because it is the most polluting energy source, accounting for more than 40 % of global fossil fuel emissions. Compensation for affected workers is not included. Neither are adjustments to electricity grids and investments in battery storage. It is calculated that these would not fundamentally change the result.

Most investments must be made before 2030, some USD 3 trillion a year. The economic benefit of this global mega-transition would be visible in the longer term, in the form of avoided climate destruction.

By the end of the century, the global GDP gain would be as high as USD 78 trillion, some 80% of current global GDP. In other words, up to the year 2100, the world’s GDP gain would be about 1.2% annually.

The benefits are based on estimates of the GDP damage that will not occur if ‘green’ replaces coal. Unbridled climate change has high socio-economic costs, the IMF has been arguing for years. The fund uses models that map out the social costs of climate change (social cost of carbon). These include damage to agriculture, devastation by floods (such as the billions damaged last year in Germany, Belgium, the Netherlands, and recently in Kwazulu-Natal, South Africa), loss of productivity and death by heat, and the costs of extra energy (air conditioning).

These social costs can be expressed in terms of the damage caused by one tonne of CO2. The scientists use USD 75 per ton, the amount the IMF usually calculates with.

South Africa’s just energy transition

South Africa is the world’s 15th-largest emitter and the world’s worst coal polluter in proportion to population size. A recent study by NBI and BCG shows that South Africa needs ZAR 6 trillion to decarbonise in 30 years.

Half of this number is related to the power sector. Bearing the GDP (USD 350 Billion) of South Africa in mind, a rough calculation learns that South Africa need to redirect into green energy 1.7% per year of the GDP to move away from coal by 2050.

In the political debate, the impact of the just transition on coal workers dominates the discussion. It is estimated that the job transition and compensation costs totalling R 6 billion, USD 17,5 million annually for the coming 2 decades. The premise is a supportive approach: protecting the income and livelihoods of fossil fuel workers affected by a transition to a low-carbon economy, including retraining, relocation, pensions etc. This is 0,3% of the total transition costs for the power sector over the next 20 years.

To put that into perspective, this year alone, Eskom has spent about R 4 billion (USD 235 million) on Diesel to keep the lights on.

The elephant in the room

Who is going to pay for this global shift away from coal? For a long time, economists believed that the money would flow to the right place if governments would just price CO2 emissions correctly. Companies and citizens would then really have to pay the social CO2 price, in the form of taxes on emissions or via CO2 emission allowances for companies. This price incentive would automatically make fossil energy unattractive: the market would do its work.

According to the three economists, more is needed, because CO2 pricing has not taken off sufficiently worldwide. Rich countries would have to bear the costs themselves; development banks such as the World Bank would be given an important role in financing poor and emerging countries. Investment costs for the developed world to cover these global annual climate financing needs would be in the range of 0.5% to 3.5% of rich countries’ GDP. The USD 8.5 billion pledge done during COP26 to South Africa from Britain, France, Germany, the United States and European Union, is a major test of whether wealthy nations can help developing countries embark on a just transition away from coal.

A little less conversation, a little more action, please

Phasing out coal is not just a matter of urgent necessity to limit global warming to 1.5°C; it is also a source of considerable economic and social gain. Net economic benefits from ending coal are so large that a general policy implication from IMF’s analysis is that efforts should be redoubled to achieve a global agreement to phase out coal as soon as possible.

South Africa cannot afford to sit idle; the cost of inaction is massive. South Africa will urgently need to adapt to climate change; the country is among the countries at greatest physical climate change risk. To get to net-zero will require at least 150GW of renewables by 2050, which amounts to about 5GW per year every year for the next 30 years or more.

That is almost three times the current domestic electricity generation capacity. In 2020, the CSIR and Meridian concluded that the “least-cost” option would be to build a system where 74% of our power comes from renewable energy by 2050.

Notwithstanding the exact outcome for 2050, it does no harm to fast-track rooftop and commercial (C&I) self-generation to ease demand.

A potential growth of at least 500 MWp per year will result in reducing one stage of load shedding in 2024. Moreover, there is low hanging fruit in energy efficiency and demand management systems. The greenest energy is the energy you do not use. There is no time to waste. Starting now would also mean the country starts filling the current shortfall of generation capacity and moving away from dirty coal at the same time.