RENÉ LAKS: How replacing coal with renewable energy could pay for itself

As temperatures in Europe soar to record levels the world just got a glimpse of its climate future. And with energy prices rising as a result of the war in Ukraine and Russia’s restrictions of gas flows into Europe, some EU countries have announced plans to reopen coal-fired power stations.

Russia’s invasion of Ukraine has created an energy crisis that is worsening the climate crisis; dirty energy is gaining ground and greenhouse gas emissions are rising.

Closer to home, SA businesses and households are experiencing the worst load-shedding since 2008. Eskom has shed 3,084GWh so far in 2022. By comparison, it’s the total of all planned outages for the whole of 2021.

Never let a (power) crisis go to waste

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 macroeconomic perspective. The IMF recently 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 often centres on the costs of the energy transition. Those are high, but the economic benefits of the transition are many times higher. By comparing the present value of avoided emissions with the present costs of replacing coal with renewable energy, they estimate the world can realise a net gain of $78-trillion by 2100 through a shift to renewable energy.

The IMF describes 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°C. Solar and wind energy will replace coal. Such a change will cost an enormous amount of money — $29-trillion worldwide, more than the total GDP of the US.

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. Most investments must be made before 2030, about $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 $78-trillion, about 80% of current global GDP. In other words, up to 2100 the world’s GDP gain would be about 1.2% a year.

The benefits are based on estimates of the GDP damage that will not occur if “green” replaces coal. Unbridled climate change has high socioeconomic costs. The IMF 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 worth of damage in KwaZulu-Natal) the loss of productivity and death by heat, as well as the costs of extra energy such as air conditioning.

SA’s just energy transition

SA is the world’s 15th-largest emitter and the world’s worst coal polluter in proportion to population size. A recent study by the National Business Initiative and Boston Consulting Group shows that SA needs R6-trillion to decarbonise in 30 years. Half of this number is related to the power sector. Bearing in mind SA’s GDP of $350bn, a rough calculation tells us SA needs to redirect 1.7% of the GDP into green energy a year 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 will cost a total of R6bn, $17.5m annually for the coming two decades. This is 0.3% of the total transition cost for the power sector over the next 20 years. To put that into perspective, this year alone Eskom has spent about R4bn ($235m) on diesel to keep the lights on.

Elephant in the room

Who is going to pay for this global shift away from coal? For a long time economists believed 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. More is needed because CO₂ pricing has not taken off sufficiently worldwide.

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, including transfers to developing countries. The $8.5bn pledge during COP26 to SA from Britain, France, Germany the US and the EU is a major test of whether wealthy nations can help developing countries embark on a just transition away from coal.

Less talk, more action

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

SA will urgently need to adapt to climate change; the country is among those at greatest physical 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 independent power producers and rooftop and commercial self-generation to ease demand — it’s a no-regret option. A potential growth of at least 500MW 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, so 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.

• Laks is SA GM at international renewable energy independent power producer CVE.