AIA Southern African Energy Outlook

A TOOL TO ASSIST COMPANIES TO DISCLOSE AND MANAGE RISKS AND OPPORTUNITIES CAUSED BY CLIMATE CHANGE AND THE ENERGY TRANSITION (TCFD)
Energy

Among the change that the COVID-19 pandemic has brought, lies another threat to lives and livelihoods – a changing climate. Each of the last four decades has been successfully warmer than the one before it. Since the mid-1880s, human activities are estimated to have driven the average global temperature to rise by approximately 1.2 degrees Celsius. In recognition of this, 195 countries adopted the Paris Agreement in December 2015 at the 21st Conference of the Parties (COP21). This landmark agreement sought to drive the global response to the threat of climate change by “holding the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels (between 1850-1900) and pursuing efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels” (IPCC, 2021). This goal has now been re-confirmed by all the parties to COP26 in Glasgow.

In order to achieve no more than a 1.5 degree temperature increase, global net anthropogenic CO2 emissions need to decline by 45% by 2030 from 2010 levels. In the case of a 2 degree Celsius limitation of global warming, CO2 emissions are required to decline by 25% by 2030 with the goal of reaching net-zero around 2070.

South Africa has set out to achieve these long-term temperature goals through the Nationally Determined Contribution (NDC). This has seen a commitment of keeping national greenhouse gas emissions in line with an upper level of 510 Mt CO2-eq for the first defined time frame in the NDC (2021-2025); and an upper level of 440 Mt CO2-eq during the second time frame (2026-2030). These figures are a 17% and 28% improvement on 2015 NDC report, respectively. The decarbonisation of the South African economy will in the 2020s focus primarily on the electricity sector; in the 2030s a continued decarbonisation of the sector alongside the transition of the transport sector towards low emission vehicles. The 2040s and beyond will target the hard-to-mitigate sectors. The key challenge during the first phase of the NDC will be the transition in the energy sector as South Africa’s economy and energy system is one of the most coal-dependent in the world consisting of a large range of high-carbon infrastructure.

The important steps on the TCFD journey

WHERE ARE WE NOW?
  • Shown an awareness of climate change and its risks
  • Identified key risks
  • Transitioning to concerted action - Road to Zero and Project Zero
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TAKE IT FURTHER
  • Unpacking risks and opportunities through thorough scenario analysis and potentially augmenting work on technology pathways

It is this rapidly evolving context that companies in South Africa and globally need to operate within and navigate through. At Africa International Advisors we see the impact being felt by companies through the following five different mega-forces or channels:

  • Changing regulations and societal expectations
  • Changing absolute and relative prices of energy
  • Changing business models with numerous possibilities for disruption
  • Changing patterns of demand for numerous products no matter how peripheral to energy
  • The potential physical impacts of climate change on businesses and their ability to operate

Each of these mega-forces on their own would have a significant impact on business. However, when combined these forces hold the potential to change the business environment dramatically and rapidly.

To complicates matters, while the science of climate change may become clearer much else is far from certain. For instance:

  • Will export dependent and developing economies such as South Africa face pressure through trade restrictions to rapidly de-carbonise or will these countries be able to negotiate access to global markets regardless of emissions profile?
  • Will South Africa transition to a low carbon economy in line with the globe or it be an outlier, with obvious implications for local business?
  • Will the globe continue seeing a rapid decline in the costs of battery storage or will rising metals prices force us to use gas for longer as a back-up fuel?
  • Will we see a continued role for large power utilities enjoying the advantage of scale and operation of the grid or will we see a highly de-centralised market with small producers and consumers that also produce?
  • Is it inevitable that the greater electrification of our energy system and a switch to greater renewables will lead to greater demand for metals such as copper, platinum and nickel? Or will we see new technologies develop that by-pass these technologies?
  • What technology choices should logistics companies make as they look to de-carbonise their value chains?

Increasingly investors are demanding that companies consider these developments in their strategic planning and disclose the risks of climate change. In 2017 the Task Force on Climate-related Financial Disclosure (TCFD) published recommendations for companies to disclose their risks and opportunities related to climate change. These recommendations required companies to:

  • Discuss the orgaisation’s governance around climate change
  • Discuss the actual and potential impact of climate change on the company’s strategy
  • Discuss how the organisation identifies, assess and manages climate change related risks
  • Discuss the metrics and targets used by the organisation to assess and manage the risks and opportunities related to climate change

The TCFD further recommended that companies make use of scenario analysis to determine the risks and opportunities to their strategy and manage these.

A key challenge facing companies in Southern Africa is that while many of the challenges faced by this country are unique, there is a lack of scenarios and resources that can help them quantify the risks and opportunities particular to the sub-region.

Africa International Advisors therefore developed a unique set of energy scenarios, specifically tailored for Southern Africa. These scenarios position four plausible futures for the energy in the region. These very different futures are based on different outlooks for, not only for the pace and scale of transition to net zero but also the level of regional integration.

The four potential energy scenarios for our future are illustrated below:

  1. Going Nowhere Slowly
    A scenario where Southern Africa follows a transition trajectory that aligns closely with the region’s current energy plans and a 3-4 degree global temperature rise. In addition, we see a decline in the level of regional integration as different countries and regions pursue energy security through greater independence.
  2. Cooking with Gas
    A scenario that sees a similarly slower transition to net zero but with much greater regional energy integration. This high level of regional integration results in the development of a regional gas economy fed by the gas find in northern Mozambique and elsewhere in the region.
  3. Congo Rapids
    A scenario that sees a shift to net zero emissions by 2050 with nuclear energy and hydro resources in the region playing a significant role in this de-carbonisation because of disappointing progress in battery storage technology. The development of such large regional low carbon energy solutions drives the region towards much tighter and more rapid integration.
  4. Sunshine in a Bottle
    A scenario in which battery and renewable technology continues to develop rapidly. This negates the need for large utilities and sees much less policy and utility led regional integration. Instead, there is large growth in small scale generation and by pro-sumers with the market being balanced through extensive market trading.

AIA has developed Southern African Scenarios, precisely to deal with the unique challenges of this region

Product Energy Diagram Structured Process
AIA have used the different political and technological drivers to develop a set of regional energy scenarios that relies on an extensive energy model and database for the region

Each of these scenarios are not only plausible but provide very different outlooks for renewable energy, batteries, gas and coal. They also hold very different implications for the types of actions companies need to take to reach their own climate mitigation goals or what opportunities may enjoy or risks that they may face as a result of climate change and the energy transition.

At AIA – we believe that our scenarios can greatly assist companies that wish to understand the implication of the energy transition for their organisation and its strategy. This can assist not just in facilitating reporting in terms of TCFD but also drive better strategic decision making.

Drop us an email at energy@africaia.com for further enquiries.