Blackouts and Backsliding

South Africa’s fossil fuel subsidies tripled between FY 2018 and FY 2023, from ZAR 39 billion (USD 2.9 billion) in FY 2018 to ZAR 118 billion (USD 7.5 billion) in FY 2023. This spike in FY 2023 was mostly due to the global energy crisis, as consumer subsidies reflected increases in the prices of oil, gas, and coal. Global subsidies also reached a record high of USD 1.5 trillion in 2022 as governments clambered to respond to the energy crisis. The largest share of fossil fuel subsidies in South Africa in FY 2023 went to oil and gas consumption, carbon tax exemptions, and the electricity sector. Fossil fuel subsidies continue to ensure fossil fuels are locked into energy systems.

Recommendations

• South Africa should have a roadmap for meeting its international commitments around fossil fuel subsidy reform. This roadmap for reform should have concrete deadlines and detailed implementation plans for the removal of all fossil fuel subsidies, except for those necessary to support the poorest populations. Countries can look to Canada as the first country to introduce a framework for removing fossil fuel subsidies to domestic fossil fuel companies.

• Government must also ensure alternate clean energy and transport solutions are made available and accessible for citizens.

Total oil and gas subsidies have more than doubled since FY 2018, reaching ZAR 52 billion (USD 3.5 billion) in FY 2023 compared to ZAR 23 billion (USD 1.7 billion). This was partly driven by an increase in global fuel prices: oil and gas subsidies for consumers dwarf those for production. The value-added tax exemption, a universal consumer subsidy on the sale of petroleum, diesel, and illuminating paraffin, remained the highest-value oil and gas subsidy at ZAR 30 billion (USD 2 billion), up from ZAR 19.8 billion (USD 1.5 billion) in FY 2018. But oil and gas subsidies also increased due to new subsidies introduced in response to the global energy crisis: the government froze the general fuel levy on petrol and diesel in February 2022 and then reduced it by ZAR 1.50 (USD 0.9) per litre from April to June. This led to foregone revenue of ZAR 12.6 billion (USD 0.8 billion).

Untargeted consumer energy subsidies, particularly for gasoline and diesel, tend to benefit richer consumers the most because they consume the most energy. However, the poor can also be hit hard because they can least afford any increase in prices, including inflationary impacts of energy on the cost of living and doing business. Energy subsidies are not the best way to support the most vulnerable during a cost-of-living crisis. Instead, cash transfers or other welfare channels can be more effective and do not lock in ongoing consumption of polluting fossil fuels.

Recommendation

• Government needs to ensure all oil and gas consumer subsidies are well designed and targeted to make sure that support goes where it is needed most—and then eventually replace these subsidies with alternate social welfare support that is delivered in ways that protect the most vulnerable consumers.

Electricity subsidies are classified as fossil fuel subsidies because most electricity (86%) in South Africa is generated from coal; a shift to renewables and storage would change this. While fossil fuel subsidies should be phased out, there is a case for continuing and increasing targeted electricity subsidies, given their importance for the poor in South Africa and the need to supply modern, clean energy (vs. biomass or kerosene).

The largest electricity subsidy is the Free Basic Electricity (FBE) access program at ZAR 10.6 billion (USD 0.65 billion). This program, designed to enable electricity access, has remained largely unchanged since FY 2018, and fuel poverty continues to be a major issue. Recent findings show that the FBE is probably much lower than it should be. There are two issues: the free allowance is too low, and many deserving households are not able to access the subsidy.

Even under very conservative estimates of basic needs, the FBE, which currently allows for 50 kWh of free electricity per month to eligible households, would need to increase to at least 250 kWh per household. In addition, the way municipalities determine eligibility results in significant numbers of poor households failing to qualify—many households who do qualify are not receiving it. In 2020, an estimated 5.4 million households that should have been receiving the FBE were not, translating into a value of ZAR 6 billion (USD 0.37 billion). The current FBE would need to increase by 50% to capture these households. Hence, changes need to be implemented so that the FBE can actually target and capture the missing vulnerable households in South Africa. Energy poverty continues, and the issue of well-targeted subsidies and electricity access is an important one.

Recommendations

• Government should implement targeted and well-designed electricity subsidies that allow the poor and vulnerable to access energy. Significant changes need to be implemented for the FBE to better target and eventually capture the “missing” vulnerable households in South Africa. These changes include a redefinition of the benchmarks around “affordable access to sufficient quantities of clean and safe energy,” governance and administrative changes for municipalities, and improved oversight.

• Government should also ensure cleaner energy sources are available to all households and offer subsidies that allow poor and vulnerable users to better access these sources.

Better-targeted electricity consumer subsidies alone will not guarantee access to clean and affordable energy. South Africa has been dealing with an ongoing electricity crisis. Eskom, the national electricity utility, cannot provide sufficient electricity supply and recurring severe scheduled power cuts, known as load shedding, have increasingly become part of life. Eskom’s history of poor management, an aging and poorly maintained fleet of coal generation plants, and a lack of investment in both new generation and the grid have all contributed to this crisis. Eskom itself is heavily indebted and has required ever-increasing bailouts by the government even as its reform continues to be delayed.

One response to the electricity crisis has been demands to extend the life of coal assets and build out more coal infrastructure or develop new gas-fired power. Government has recommended that Eskom delay the decommissioning of its aging coal power plants to minimize load shedding. However, the electricity supply crisis is an ideal driver for transitioning toward renewables and storage.

Recommendation

• South Africa’s current system of bailouts and fossil fuel subsidies will not help it deal with its load-shedding crisis. Government should enable solutions to address load shedding in the immediate to short term, such as by supporting grid upgrades, cheaper renewables, and storage, and making the long-term structural changes needed for electricity sector transformation and clean energy transition. Revenue from ending carbon tax exemptions could be one source of funding for this.

• Government should also ensure cleaner energy sources are available to all households and offer subsidies that allow poor and vulnerable users to better access these sources.

While some subsidies for renewable energy do exist, they have not been estimated due to a lack of reporting and data transparency. The renewable energy tax incentive, a deduction for businesses that build embedded generation (wind, concentrated solar and hydropower below 30 MW, biomass above 1 MW, and solar photovoltaic [PV] projects), has recently expanded to stimulate investment until 2025. In addition, a new 1-year solar panel tax incentive subsidy was introduced in 2023, where individuals can claim a rebate of 25% of the cost of new solar (rooftop) panels up to ZAR 15,000 (USD 917) to encourage households to invest in clean electricity generation.

While renewables only contribute a 6% share of total electricity generation in South Africa, the country managed to increase its installed capacity tenfold, from 0.9 gigawatts (GW) in 2011 to 10.4 GW in 2022 (renewables saw a fivefold increase globally over the same period). The REIPPPP, a series of competitive energy auctions awarding long-term power purchase agreements (PPAs) to independent power producers, has allowed a rollout of renewable energy capacity while ensuring renewables prices have dropped sharply in South Africa. As of the 2022 bid window 6, the cost of renewable energy in South Africa had decreased by more than 77% since the first auction in 2011 to ZAR 0.49 (USD 0.03) per kWh for wind and solar (ZAR 2022 basis). While the cost of PPAs for renewable energy projects in early auctions will have likely created subsidies (because early PPAs were likely to have been higher than the average cost of electricity supply), we have been unable to accurately estimate these due to the lack of publicly available data. But as renewable energy technology costs fell, any subsidies that existed for renewable generation will have also decreased. Renewables are now the cheapest option (on a levelized cost of electricity basis). Globally, in 2023, 75% of new solar and wind projects had lower generation costs than existing coal and gas, and 96% of new utility-scale onshore wind and solar supplied electricity more cheaply than new coal and gas plants.

Renewables in South Africa continue to face challenges. There are still critics who claim that renewables are too expensive and that coal plants should have their lives extended or that new coal or gas should be rolled out to help lower prices and deal with South Africa’s electricity supply crisis. Suggested alternatives to renewables include gas, Karpowerships, and even new coal. But gas and Karpowerships are expensive and can expose governments and consumers to price volatility. In addition, the newer in-house coal projects developed by Eskom, Medupi, and Kusile have encountered major delays and cost overruns. Access to the grid for renewables remains an issue: no wind projects were approved in the last bidding round due to a lack of grid capacity in the proposed areas.

If South Africa moves away from coal and toward gas, it is going to become more exposed to volatile international energy prices, as well as ever-increasing carbon pricing through future carbon border adjustment mechanisms. Building new renewables would shield the government and consumers from this exposure.

Recommendation

• Instead of spending on fossil fuel subsidies, the government should redirect resources to make the energy sector clean, functional, accessible, affordable, and shielded from volatile fuel prices and future crises.

Carbon tax exemptions for energy production, such as Eskom’s emissions from burning coal for electricity, rose between FY 2018 and FY 2023, reaching ZAR 47 billion (USD 2.9 billion) of foregone revenue in FY 2023. This revenue could be redirected to help address South Africa’s energy supply crisis through grid investment, support for storage or renewables, and helping to address energy access and poverty.

South Africa’s carbon tax, the first tax of its kind on the African continent, was introduced in 2019 with a low net carbon tax rate to give big emitters time to transition. While the current tax rate sits at ZAR 144 (USD 8.8) per tonne of carbon dioxide equivalent (tCO₂e), the World Bank’s High-Level Commission on Carbon Prices estimated that carbon tax should be between USD 40 and USD 80 per tCO₂e by 2020 and between USD 50 and USD 100 per tCO₂e by 2030. The current level, even without considering allowances, is well below this. As carbon pricing sees greater global uptake, South Africa will be exposed to carbon border adjustment mechanisms if its carbon tax continues to lag far behind international prices. According to the International Monetary Fund, undercharging for the environmental costs and foregone consumption taxes for coal, diesel, gasoline, and natural gas cost South Africa an estimated ZAR 916 billion (USD 56 billion) in 2022 (i.e., through externalities or social costs).

South Africa’s initial low carbon taxes, tax-free allowances, and exclusions mean that, depending on the sector, 60% to 100% of emissions are not taxed. This initial transition phase of the carbon tax scheme has now been extended to 2025, meaning the government will continue to forego this tax revenue, and those heavy emitters will be disincentivized to lower their emissions.

Finally, it should be noted that the carbon tax is not practical or payable for Eskom, one of South Africa’s largest emitters, given its delayed reform and high level of indebtedness. A plan to phase in the carbon tax for Eskom will need to be designed and should include a signal to ensure Eskom will be incentivized to reduce its exposure to a carbon price, such as by increasing its share of renewable generation.

Recommendations

• Government should phase in higher taxes to reflect environmental costs and remove carbon tax exemptions and allowances, making the fossil fuel industry fully responsible for their pollution liabilities.

• Carbon tax revenues could be used strategically, for example, to support social welfare, clean energy, and just energy transitions in a way that addresses South Africa’s energy crises and honours the COP 28 commitment to transition away from fossil fuels in energy systems.