South Africa Presentation made during OECD/IEA CCXG Global Forum March 2014: Overview and Insights from South Africa’s Key Climate Initiatives

1. 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

2. 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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3. 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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4. • 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
4
National Climate Change Response White Paper:
Finance and Flagship Programmes

5. 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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6. 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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7. 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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8. 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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9. 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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10. 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
10

11. Total Estimated Project Cost for All Windows
Technology
Number of Preferred
Bids
Net 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)

12. 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

13. Procurement Process
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Source: Renewable Energy Independent Power producers team (March 2014)

14. Contractual Arrangement
14
IPP
GovernmentEskom

15. 15
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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16. 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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17. 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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18. 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
Criticalframeworks

19. 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

20. Initial Market Response (DBSA: 2014)
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Positive Funding Demand:
Mostly testing & scale-up of start-up projects in the following
sectors:
Renewable Energy, Energy Efficiency, Waste Management,
Biodiversity Benefiting Businesses, Sustainable Agriculture
and Land Use Management Models.
Overall, RFPs amount to funding requests of
approximately USD1,2 billion
Picture of SA green economy landscape emerging?

21. 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.

22. 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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23. 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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24. 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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25. 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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26. 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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27. T
THANK YOU.
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28. 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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29. 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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