FROM FOSSIL FUELS TO RENEWABLES

R6-billion – first estimate of Just Transition in South Africa

By Michelle Cruywagen, Mark Swilling and Megan Davies 10 December 2019
Caption
No matter which way you look at it, a just transition in South Africa is going to be a costly affair. But, as the saying goes, there are no jobs on a dead planet. (Photo: EPA / NIic Bothma)

This estimated cost model figure of R6-billion could prove instrumental in shaping the strategies employed to transform the South African economy.

South Africa has a unique opportunity to be the first coal-based economy in the global south to successfully transition to renewable energy — the energy source of the 21st century. South Africa is also unique because it has an ageing fleet of coal-fired power stations that must be decommissioned over the next 20 years. South Africa has no choice: it must build more energy-generation capacity to offset the closures. But does this mean replacing coal-fired power with more coal-fired power?

The rationale for an energy transition from coal to renewables can be traced back to our Nationally Determined Contributions (NDCs) as part of the Paris Accord. South Africa’s international commitment to climate action spells out a Peak-Plateau-Decline trajectory for our carbon emissions. On the domestic front, we have recently witnessed the ratifying of our electricity roadmap to 2030 (the Integrated Resource Plan) that commits South Africa to a decarbonisation pathway hinging on the decommissioning of coal-fired power stations and the rapid uptake of renewable energy.

IRP: lowest-cost energy future hinges on the ‘just transition’

The Integrated Resource Plan 2019-2030 (IRP) released in October by Minister of Minerals and Energy Gwede Mantashe clearly stated that the lowest-cost energy solution for South Africa was renewable energy plus gas, coupled to the decommissioning of all the coal-fired power stations except Medupi and Kusile. The National Treasury’s Economic Strategy document committed South Africa to pursue the lowest-cost option. And on 2 October 2019, a statement released by the ANC NEC stated clearly that the lowest-cost option is what is needed for South Africa’s closely tied energy sector and economy.

The IRP, however, deviates from the lowest-cost option by including 1,500MW of new coal-fired power. This will cost South Africa R100-billion more than the lowest-cost option. However, the SA Government is unlikely to find a funder at a time when investors are pulling out of coal en masse. The plan includes the decision to “retain the current annual build limits on renewables (wind and PV) pending the finalisation of a just transition plan”. The just transition plan was first mooted by the president in his statement sent to the UN Climate Summit on 23 September 2019. In short, the more renewables, the less need there is for coal; but subject to an idea that, as yet, has absolutely no substance.

The “just transition” means many things, from radical visions of a post-capitalist socially just future powered by renewable energy, through to a nuclear-driven mass industrialisation programme, through to ensuring coalminers who lose their jobs are employed elsewhere.

When government-related policy-makers speak, what they usually have in mind is the future of Mpumalanga’s coal-based economy that supports the livelihoods of around 82,000 coal miners. With the loss of 60,000 jobs in the declining gold sector over the past decade fresh in their minds, unions correctly refuse to consider any deviation from coal-fired power generation.

Unsurprisingly, while renewable energy may be the lowest cost-option, has the potential to create more jobs than the coal sector and is thus best for stimulating economic growth, the ANC leadership will not take on the unions. This is tragic because South Africa missed the information boom of the 1990s, the resources boom of the 2000s, and now it stands to miss the renewable energy boom of the 2020s.

But while everyone plays ideological football, no-one has looked at the real numbers of what this image of the just transition would imply. We have.

Lessons from just transition strategies

Many countries have implemented extensive just transition programmes to protect workers as they transition away from fossil-fuel based economies. These include notable examples from Germany, Australia, Canada, the Netherlands, Spain, the UK, Poland and Ukraine — each with limited degrees of success in their respective intentions. Many developing countries, particularly in the global south, have yet to implement explicit efforts to realise a just transition.

South Africa is well positioned to build on lessons learnt from the implementation of these just transition strategies to give effect to policy commitments and the South African government’s developmental agenda. However, a context-based approach is crucial and widely recommended by researchers and practitioners.

Applying a cost model to the just transition in South Africa

Energy transitions researchers at Stellenbosch University’s Centre for Complex Systems in Transition (CST) applied local data to an international just transition framework in a recent study examining the potential of just transition strategies to protect workers. This research was an ambitious undertaking, and the first of its kind in South Africa.

Led by Michelle Cruywagen, the research used empirical modelling to estimate the cost of a just transition, that would prioritise worker support and protection. The research relied on national labour data from Stats SA, the Minerals Council and company data. It identified approaches, mechanisms and contraction rates that protect coal workers’ livelihoods under various scenarios, as many of them are forced to exit this declining industry, either through retirement or the migration to other employment sectors.

The cost model employed in the study is based on a framework developed by sustainability economists Robert Pollin and Brian Callaci, and was published in the scientific peer-reviewed journal, US Labor Studies earlier in 2019. The premise of the framework, which is based on a 20-year timeframe, is a supportive approach: protecting the income and livelihoods of fossil fuel workers affected by a transition to a low-carbon economy.

The framework’s authors highlight the prerogative of climate stability and need to provide “generous transitional support for workers and communities”. The model’s orientation to the protection of workers and affected communities resonates with the calls for a just transition in South Africa. There is also a strong focus on community support in the model, and their strategy is to leverage investment into low-carbon energy sectors to stimulate this. Taking into account the industry and broader national economy’s ability to provide the necessary support is also a key consideration in the model.

Pollin and Callaci apply their framework to coal mining, oil and gas extraction, petroleum refining, electricity generation, natural gas distribution and the support/ancillary sectors of coal and oil and gas in the United States.

They calculate the financial cost of the following key areas:

  1. Supporting workers facing retrenchments in areas of income, retraining, and relocation;
  2. Guaranteeing pensions for workers in affected industries; and
  3. Initiating transition programmes for fossil fuel-dependent communities.

Key dimensions for modelling the cost of a just transition

Calculating these costs requires, among other indicators, information about how the various industries are forecast to contract, how many jobs will be affected, and the ages of these affected workers. Another key dimension of the cost model is the attrition rate, which helps to describe the manner in which workers move out of the contracting industry.

The Pollin and Callaci model aims for an attrition rate of more than 80%, which is indicative of its supportive approach to workers and affected communities. The attrition rate is the percentage of workers between the ages of 45 and 65 nearing retirement, as a percentage of the number of workers that will be affected in the contraction of the industry.

Contraction and attrition rates are inversely related: the faster an industry contracts, the fewer people will be exiting the industry as planned (assuming a pension is secured at roughly the age of 65 — which is not applicable in our labour-brokered labour market). Put differently, the faster an industry contracts, the more jobs, livelihoods and wider communities will be at risk and need to be accounted for through compensation mechanisms. Unplanned job losses are likely to lead to social unrest and have devastating consequences for dependents and communities. With this in mind, the Pollin and Callaci approach recommends benchmarks for pension guarantees and works with an attrition rate of more than 80%.

The attrition rate tells us something about the proportion of workers who will enter retirement as planned, compared to workers at earlier stages of their employment lifespan facing the loss of their job as the industry shuts down. Naturally, the pace and scale of industry contraction will have an impact on the extent of workers at risk. In other words, a more optimal scenario, indicated by a higher attrition rate, is to have older workers in the 45 to 65 age group retire naturally, rather than lose their jobs prematurely and face unemployment. The lower the attrition rate, the more workers are unprotected and at risk as the industry shuts down, and, in turn, the higher the financial and social cost to the workers, communities, the economy and society at large.

Determining an appropriate attrition rate for any given industry is necessarily a context-dependent, multi-faceted and highly politicised process that implies negotiation and deliberation. For the purpose of this first application of a just transition cost framework to the South African context, the Pollin and Callaci model and attrition rate was used as a reference point.

Forecasting the cost of coal job losses over 20 years

The CST application of the model focused on the SA coal sector, using available sector and labour data. While the focus of this study was specifically on the coal sector, this model has the possibility to be applied to the energy sector more broadly. For example, it would be instructive for understanding the implications for auxiliary industries affected by the shrinking of the fossil fuel industry.

The model enabled various scenarios to be elaborated — two of these are detailed in Table 1 below. The cost model was populated with various inputs including various forecast contraction rates, the total number of people currently employed in the coal sector, and the number of workers between 45 and 65. The local scenarios are informed by attrition rates and the IRP.

(Source: Employment data: Minerals Council; Age profile: Mining Qualifications Authority & TIPS)

Scenario one — achieving a high attrition rate

The application highlights the point at which an 82% attrition rate is achieved (Row i) in relation to corresponding contraction scenarios i.e. 43%. The high 82% attrition rate implies that at most 6,600 coal workers will require re-employment over 20 years, versus 32,920 in the accelerated decommissioning scenario respectively. Even at an 82% attrition rate, 6,600 translates into 330 coal workers needing retraining per year. To meet the NDC requirements, coal usage will need to reduce beyond a 43% contraction rate.

Following Pollin and Callaci, an 82% attrition rate scenario was used to calculate the costs of the just transition in South Africa which is outlined in Table 2. In effect, the model demonstrated that the ambition for an 82% attrition rate is closely in line with a least-cost scenario outlined in the ERC’s policy paper on Paris agreement-compatible coal transitions in South Africa. However, the picture changes radically if we take the decommissioning timeframes stipulated in the IRP seriously.

Scenario two — IRP decommissioning

The second, and most startling scenario, is that based on the contraction rate implied by the IRP’s decommissioning timeframe. The IRP’s decommissioning plans suggest that 75% of electricity from coal will be decommissioned by 2043. Following this plan, employment contraction rates will need to be established as part of the just transition plan. Applying Pollin & Callaci’s attrition approach to this scenario in Table 1, 1,646 workers would need to be retrained per annum (Row g) totalling 32,920 or a 46% attrition rate. This application demonstrates how the attrition approach significantly softens the blow from 61,686 to 32,920 workers, thereby smoothing the impact of an accelerated scenario.

Complex employment dynamics in the coal sector

As this research demonstrates, calculating the cost of a just transition requires accurate and comprehensive data. In the past five years, there have been shifts in employment within the coal sector. According to the Minerals Council the annual downward shifts average around 4,000 workers per year and peaked at a decrease of 8,355 in 2015. This gives us an idea of the increments of shifts that have been occurring historically. However, there is evidence to suggest that this will increase sharply in light of decommissioning plans and could be closer to the accelerated scenarios in the model above.

Table 1 has shown that the duration of the transition, contraction and attrition rates are crucial factors to determine how many jobs will need to be protected. The number of workers between 45 and 65 also has an impact on those needing re-employment. These key factors need to be negotiated and planned when just transition implementation plans are proposed.

According to Gaylor Montmassen-Clair of Trade and Industrial Policy Strategies (TIPS) and Jesse Burton of the Energy Research Centre at UCT, local data indicates that 90% of coal workers contribute to pension funds. However, while coal workers have historically held permanent positions, recent divestment in the coal sector has paved the way for the emergence of new market leaders, who employ a significant proportion of contract workers via labour brokers.

Until recently, Anglo Coal and South 32 held dominant positions in the market. However, according to an article by Kevin Davie in the Mail&Guardian in September 2019, these companies are divesting from coal. This effectively restructures the coal mining industry and positions Exxaro and black-owned Seriti as market leaders. According to these coal companies’ websites, both have a significant portion of contract workers on their respective payrolls.

Exxaro employs 6,500 permanent workers and 15,500 contractors while Seriti employs 3,000 permanent staff and 3,000 contractors. This shifting landscape and its impact on the number of workers with limited pension cover has implications for social protection in transitions as an increasing number of workers are employed on a contractual basis.

Besides the estimated 10% (or more) of permanent workers who do not have pensions, the pension gap among contractors will need to be considered when planning a just transition for all workers. Pollin and Callaci (2019) recommend that pension shortfalls be covered by government funding.

What is the estimated cost of a just transition for South Africa, according to a contraction rate for the coal industry in line with high attrition?

Using the data from Table 1, i.e. number of workers requiring reskilling and re-employment under an 82% attrition scenario, it is possible to calculate the cost of a just transition for South Africa. The CST research estimates the annualised, and total cost, of a just transition in South Africa over a 20-year period.

The total cost of a just transition over 20 years is estimated at R6-billion.

The total cost is within the range of just transitions in other countries which are between R 1.2-billion and R5-billion.

The total cost of the just transition includes costs for compensation, retraining, relocation and rehabilitation.

Compensation costs

Compensation accounts for R1.2-billion. On average, coal salaries are R23,000 a month. On the other hand, the average salary of workers within the green economy is R20,000. As such, the difference between these is R3,000 a month. The difference between coal salaries and the average salary of the green economy equals R23,000-R20,000 = R3,000 X 12 = R36,000 X 330 X 5 years = R1.2-billion. Note that compensation costs are recommended for a period of five years. The average salary of a job in the green economy is based on salaries in likely alternative careers, for example construction, manufacturing, tourism and so on. Note that if salaries for the low-income agriculture sector are factored in, the cost of compensation will increase more significantly.

Retraining

Retraining as part of the just transition is estimated to amount to R621-million.

According to available Social and Labour Plans (SLPs), 16% of coal workers already have an undergraduate qualification. However, the retraining costs include top-up training. The balance of the 330 workers per annum are split between degrees, vocational training and solar/wind turbine technical training. The costs exclude accommodation, food, transport and salaries/stipends while retraining.

Relocation costs

Relocation, that is support provided to workers displaced from the shutting down of the facilities where they are employed, comes to R100-million.

Relocation costs were based on one month’s rent, travel costs and sundries such as legal costs for a lease averaged at R15,000 X 6,600. Not all workers will need to relocate which will accommodate variances in the average cost.

Rehabilitation and regional development

By far the costliest aspect of initiating a just transition in South Africa will be the regional development required to rehabilitate communities and local economies that have thrived, and indeed also suffered, from their centrality in South Africa’s coal-based economy.

Due to a lack of transparency regarding coal companies’ rehabilitation plans, further research is required to calculate this cost more accurately. The current estimate for regional development is based on average investments in Special Economic Zones (SEZs) in SA. Estimates for rehabilitation and regional development costs in other countries were also used.

The cost of rehabilitation of one coal mine is estimated to be R4-billion in the CER’s Full Disclosure Report The Truth about Mining Rehabilitation published in 2018. It follows that the cost of rehabilitation of the coal mining region would be significantly higher. It is likely that government will need to stimulate local economic development through innovative strategic partners from civil society and the business sector. It is important to distinguish between rehabilitation, reclamation and regional development and to further define these concepts in more detail.

While supportive attrition-based just transition approaches would likely increase income protection for coal workers, complementary sequenced sectoral and regional development strategies have proven to be effective ways to stimulate job creation.

A rough estimate

This first attempt at estimating the cost of the just transition naturally does not account for all aspects of what these efforts will entail in reality, and indeed, the dynamics that they will trigger. Specifically, the cost model does not account for full-programme costs such as pre and post assessment, just transition “model” development, establishing and managing a just transition commission, travel, accommodation and stipends for workers being retrained, strengthening social institutions (CBOs and legal support networks), health compensation costs, community and family employment initiatives, to mention a few. For this reason, the model and its resultant cost estimate must be positioned as a low-end rough estimate.

Taking the costs seriously

It is imperative that compensation, retraining, relocation, rehabilitation and pension security costs are adequately planned for in South Africa’s strategic just transition plans.

What this research does, for the first time in South Africa, is to shed light on the extent of the costs involved with realising a just transition for the coal sector. Communicating this first attempt to estimate the cost of the just transition, this R6-billion figure could prove instrumental in shaping the strategies employed to transform our economy. With increased support, this model has the potential to be deepened with more accurate figures and extended across the energy sector at large. This hinges on the participation of the mining sector in releasing accurate information about employment and rehabilitation.

But who pays?

Globally, the cost of a just transition is administered through innovative institutional and financial arrangements facilitated by national government. In some cases, a just transition commission has been constituted to administer climate and development finance, underpinned by inclusive strategic planning. High-level buy-in and leadership from government are essential to unlock sufficient resources, provide appropriate incentives and enforce punitive measures to advance the energy transition.

The first step in finalising a just transition plan

If the decommissioning timeframes stipulated by the IRP are taken seriously, South Africa’s coal sector will need to contract by two thirds. To mitigate the impact, three things must happen simultaneously.

First, the decommissioning rate must be correlated as far as possible with the best possible attrition rate. Second, the investment in retraining must correlate with investments in new renewable energy infrastructures and value chains that have proven to be labour intensive as is recommended in the Employment Implications Report by Emily Tyler and Dr Grove Steyn of Meridian Economics published in 2018.

Third, as indicated by the president in his statement to the UN summit, a fund must be established to fund the just transition. This will require a minimum of R6-billion for the bare essentials, but this will vary depending on decommissioning and attrition rates.

This research provides a first effort in this direction. No matter which way you look at it, a just transition in South Africa is going to be a costly affair. But, as the saying goes, there are no jobs on a dead planet. If our lowest-cost energy future depends on the finalisation of a just transition plan, the costing exercise initiated in this research could not come at a more urgent juncture in South Africa’s future. DM

Links:

ANC. 2019. Statement on the Outcomes of the ANC NEC Committee Meeting. [Online] Available: https://cisp.cachefly.net/assets/articles/attachments/80024_statement_on_the_outcomes_of_anc_national_executive_committee_held_on_27-30_september_2019.pdf

Burton, J., Marquard, A., McCall, B. 2019. Socio-economic considerations for a Paris Agreement-compatible coal transition in South Africa. [Online] Available: https://www.climate-transparency.org/wp-content/uploads/2019/07/CT-Just-Transition-in-South-Africa.pdf

CER. 2019. Full Disclosure: The truth about mining rehabilitation in South Africa. [Online] Available: https://fulldisclosure.cer.org.za/

CER. 2019. Integrated Resource Plan 2019. [Online] Available: https://cer.org.za/wp-content/uploads/2019/10/IRP-2019_corrected-as-gazetted.pdf

Mail & Guardian. 2019. Coal divestment hits South Africa. [Online] Available: https://mg.co.za/article/2019-09-13-00-coal-divestment-hits-south-africa

Minerals Council. 2019. Coal: Key Facts and Figures. [Online] Available: https://www.mineralscouncil.org.za/sa-mining/coal

National Treasury. 2019. Towards an Economic Strategy for South Africa http://www.treasury.gov.za/comm_media/press/2019/Towards%20an%20Economic%20Strategy%20for%20SA.pdf

Pollin, R., & Callaci, B. 2019. The Economics of Just Transition: A Framework for Supporting Fossil Fuel–Dependent Workers and Communities in the United States. Labor Studies Journal 44(2):93-138 [Online] Available: https://journals.sagepub.com/doi/abs/10.1177/0160449X18787051

MQA. 2019. Annual Report 20017-2018. [Online] Available: https://www.mqa.org.za/annual-reports

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