In a pivotal step towards a sustainable and equitable energy future, South Africa and the African Development Bank (AfDB) have formally signed a $474.6 million loan agreement. This significant financial commitment is earmarked to bolster the implementation of South Africa’s ambitious Just Energy Transition (JET) initiatives, reinforcing the nation’s drive to enhance energy security, accelerate decarbonization, and ensure inclusive economic growth. This latest agreement builds upon a foundational policy loan concluded in 2023, signaling a deepening partnership between South Africa and the AfDB in navigating this complex yet crucial transition.

“This new agreement highlights the importance of South Africa’s partnership with the AfDB in advancing South Africa’s development agenda,” stated the National Treasury. The loan is designed to strengthen efforts to improve energy security measures, accelerate the decarbonization of the economy, and enhance the socio-economic benefits of the energy transition, ultimately fostering inclusive economic growth and job creation.

Understanding South Africa’s Just Energy Transition (JET)

South Africa’s commitment to a Just Energy Transition is a monumental undertaking, reflecting both an urgent environmental imperative and a profound socio-economic challenge. As the world’s 12th largest emitter of greenhouse gases and heavily reliant on coal for its energy needs, South Africa faces immense pressure to decarbonize its economy. Approximately 80% of its electricity is generated from coal, making it one of the most carbon-intensive economies globally.

The concept of a “Just Energy Transition” is critical here. It acknowledges that moving away from fossil fuels, particularly coal, will have significant impacts on communities and workers currently dependent on the coal value chain. In South Africa, the Mpumalanga province, home to most of the country’s coal mines and power plants, stands to be most affected. A just transition aims to mitigate these negative impacts by ensuring that the shift to a low-carbon economy is equitable and inclusive, protecting livelihoods, creating new opportunities, and fostering sustainable development in affected regions. This includes reskilling coal workers, diversifying local economies, and investing in new, green industries.

South Africa’s JET is underpinned by the Just Energy Transition Partnership (JETP), a landmark agreement signed at COP26 in 2021 with an initial pledge of $8.5 billion from an International Partners Group (IPG) comprising the UK, US, Germany, France, and the European Union. This partnership aims to support South Africa in accelerating its decarbonization efforts, particularly in the power sector, while ensuring social and economic justice. The JETP framework targets significant investments in renewable energy, electric vehicles, and green hydrogen, among other areas.

The African Development Bank’s Role in Africa’s Energy Future

The African Development Bank (AfDB) is a multilateral development finance institution established to contribute to the economic development and social progress of African countries. Headquartered in Abidjan, Côte d’Ivoire, the AfDB plays a crucial role in mobilizing resources for investment in infrastructure, agriculture, human capital, and, critically, the energy sector across the continent.

The AfDB’s commitment to Africa’s energy transformation is encapsulated in its “New Deal on Energy for Africa” initiative. Launched in 2016, this ambitious program aims to achieve universal access to modern energy for all Africans by 2025, a target that includes reaching 100% access in urban areas and 95% in rural areas through a combination of on-grid and off-grid solutions. The New Deal emphasizes the importance of decentralized renewable energy (DRE) solutions, such as mini-grids and standalone solar home systems, as the fastest and most cost-effective way to expand electricity access in remote areas.

The AfDB’s energy strategy aligns with its broader “High 5s” strategic priorities: Light Up and Power Africa, Industrialize Africa, Integrate Africa, Feed Africa, and Improve the Quality of Life for the People of Africa. By investing in energy projects, the AfDB seeks to stimulate economic growth, create jobs, enhance climate resilience, and contribute to several Sustainable Development Goals (SDGs), including SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action). The Bank’s recent $40 million investment in Zafiri, an equity platform designed to accelerate renewable energy access, further underscores its innovative approach to financing Africa’s energy transition.

Details of the AfDB Loan Agreement

The $474.6 million loan agreement between South Africa and the AfDB is a crucial component of the country’s broader financing strategy for its Just Energy Transition. This particular loan is part of the third Development Policy Operation (DPO), a programmatic series of loans designed to support a country’s policy and institutional reforms. The DPO framework allows for sustained support over time, enabling governments to implement complex structural changes.

The terms of the loan are notably favorable, reflecting the concessional nature of development finance aimed at supporting critical national development objectives. With a nominal value of $474.6 million, the loan has a maturity of 15 years and includes a three-year grace period. This grace period is particularly beneficial, allowing South Africa to implement reforms and generate returns from its investments before commencing principal repayments. The interest rate is set at a daily Secured Overnight Financing Rate (SOFR) plus 1.22%. SOFR is a benchmark interest rate that has replaced LIBOR for many financial products, reflecting the cost of borrowing cash overnight collateralized by U.S. Treasury securities. The addition of 1.22% above SOFR offers a competitive rate, significantly lower than what South Africa might secure from purely commercial lenders, highlighting the AfDB’s role as a development partner.

The National Treasury expressed its appreciation for the AfDB’s sustained partnership, emphasizing that this support is vital for implementing critical reforms in the energy and transport sectors, advancing the country’s JET goals, and meeting foreign currency commitments at lower interest rates. This latter point is crucial, as securing foreign currency loans at favorable rates helps to manage South Africa’s overall debt portfolio and reduces exposure to exchange rate volatility.

A Coalition of Global Support: The Multi-Partner Development Policy Operation

The AfDB loan is not a standalone initiative but forms part of a larger, coordinated effort by multiple international financial institutions to support South Africa’s structural reforms. This third Development Policy Operation includes participation from several key global players:

• The World Bank: The World Bank has been a significant partner in South Africa’s energy sector reforms. In June 2025, the World Bank approved a substantial $1.5 billion loan to support South Africa’s structural economic reforms and improve infrastructure. These funds are specifically aimed at helping the government achieve its target of adding 3,500 megawatts of renewable energy capacity by March 2027 and attracting private investment for 200 kilometers of new transmission lines. This follows a $1 billion loan approved in 2023 for energy sector reform, underscoring the World Bank’s consistent commitment.
• KfW Development Bank (Germany): Germany, through its state-owned development bank KfW, is a strong supporter of South Africa’s energy transition. In July 2025, South Africa secured a €500 million (over $583 million) loan from KfW, also aimed at stimulating the urgent growth of the country’s electrical grid and facilitating reforms for private investment in renewable energy. This loan is part of Germany’s broader pledge at COP26 to support South Africa’s JETP, with Germany’s three policy loans implemented by KfW totaling €1.3 billion.
• Japan International Cooperation Agency (JICA): JICA is Japan’s governmental agency responsible for delivering the bulk of Japan’s Official Development Assistance. JICA has a strong focus on energy development in Africa, particularly in promoting stable and affordable energy supply and supporting energy transition. Their involvement in this DPO signifies Japan’s commitment to supporting South Africa’s decarbonization and infrastructure development efforts. JICA’s energy projects in Africa often include technical cooperation and financial support for power generation, transmission, and distribution, with a focus on renewable sources like geothermal and hydro.
• The OPEC Fund for International Development (OPEC Fund): The OPEC Fund is a multilateral development finance institution that provides financial assistance to developing countries. While historically associated with oil-producing nations, the OPEC Fund has increasingly diversified its portfolio to support sustainable development, including energy transition initiatives. Their participation in this loan package highlights a growing global consensus on the importance of financing climate action and sustainable infrastructure in developing economies. The OPEC Fund has recently announced new commitments to accelerate global development impact, including significant financing for energy, water, and infrastructure.

This multi-partner approach provides comprehensive financial and technical support, addressing various facets of South Africa’s reform agenda, from energy sector efficiency to the resilience and sustainability of its infrastructure services. Such coordinated international backing is crucial for a transition of this scale and complexity.

South Africa’s Energy Challenges and the Path to Decarbonization

South Africa’s energy landscape is dominated by Eskom, the state-owned power utility, which has historically relied heavily on a fleet of aging coal-fired power plants. This reliance has led to significant challenges, including:

• Energy Insecurity and Load Shedding: Frequent and prolonged power cuts, known as “load shedding,” have plagued South Africa for over a decade, severely impacting economic growth and daily life. These blackouts are primarily due to insufficient generation capacity, aging infrastructure, and operational inefficiencies at Eskom’s coal plants.
• High Carbon Emissions: The heavy dependence on coal makes South Africa one of the world’s largest per capita emitters of greenhouse gases, contributing significantly to global climate change.
• Environmental and Health Impacts: Coal-fired power generation leads to severe air pollution, water scarcity, and land degradation, impacting public health and the environment.
• Financial Strain on Eskom: Eskom has accumulated massive debt, making it financially unsustainable and a significant risk to the national fiscus. Reforms are underway, including debt relief measures and plans for unbundling Eskom into separate generation, transmission, and distribution entities to improve efficiency and attract private investment.

The JET aims to address these multifaceted challenges by accelerating the shift towards a cleaner, more reliable, and sustainable energy mix. South Africa’s climate change commitments include a pledge to peak its greenhouse gas emissions between 2020 and 2025 and to work towards keeping global temperature increases below 2°C, in line with the Paris Agreement. The country’s Integrated Resource Plan (IRP) aims to achieve 40% of its installed capacity mix from renewables by 2030, a substantial increase from the current 22%. This will involve significant deployment of solar PV and wind power.

Socio-Economic Benefits and Green Job Creation

The “Just” in Just Energy Transition is paramount for South Africa. The transition away from coal, while environmentally necessary, poses significant socio-economic risks for coal-dependent regions. The coal mining sector, though increasingly mechanized, still employs a substantial workforce, and associated industries support entire communities.

The loan agreement and the broader JETP framework are designed to ensure that the energy transition fosters inclusive economic growth and creates new job opportunities, rather than exacerbating unemployment and inequality. This involves:

• Green Job Creation: The renewable energy sector, including solar and wind power, is a significant source of new employment. Research suggests that Africa’s green economy could create over 3 million direct jobs by 2030, with the renewable energy sector alone contributing up to 2 million jobs, of which 1.7 million could be in solar. In South Africa, increasing the share of renewables could lead to an additional 40% increase in employment between 2018 and 2030, accounting for 580,000 job years, with some projections suggesting up to 1.2 million job years along the renewable energy value chain by following least-cost pathways. These jobs span manufacturing, construction, installation, maintenance, and services.
• Economic Diversification: Investing in renewable energy and associated industries can help diversify the economies of coal-dependent regions, creating new economic hubs and reducing reliance on a single, declining sector.
• Skills Development and Reskilling: Programs will be essential to reskill coal miners and power plant workers for roles in the renewable energy sector and other green industries, ensuring a smooth transition for the workforce.
• Improved Health Outcomes: Reduced air pollution from coal plants will lead to significant public health benefits, lowering the incidence of respiratory diseases.

The loan’s focus on structural reforms also extends to the transport sector, which is a major consumer of liquid fuels and a significant contributor to greenhouse gas emissions. Efforts to decarbonize transport, including the adoption of electric vehicles and the development of public transport infrastructure, will create further green job opportunities and improve urban air quality.

The Global Context of Energy Transition Finance

South Africa’s JETP and the associated financing from multilateral development banks and other international partners are part of a growing global trend. Developed nations and international financial institutions are increasingly recognizing their responsibility to support developing countries in their energy transitions, given the historical emissions of industrialized economies and the disproportionate impact of climate change on vulnerable nations.

Climate finance, encompassing local, national, and transnational funding from public, private, and alternative sources, is crucial for supporting mitigation and adaptation actions. Mechanisms like the Green Climate Fund (GCF), Global Environment Facility (GEF), and various bilateral and multilateral initiatives are channeling funds to help countries decarbonize. The goal of mobilizing $100 billion per year for developing countries by 2020 (reaffirmed in the Paris Agreement) underscores the scale of financial support deemed necessary.

The South African loan agreement exemplifies the complex, multi-layered financing mechanisms required for such large-scale transitions. It combines concessional loans from development banks with the potential to crowd in private investment, reflecting a blended finance approach. This strategy is vital for unlocking the vast capital needed to transform energy systems, particularly in emerging markets where perceived risks can deter purely commercial financing. The favorable terms of the AfDB loan, including its long maturity and grace period, are designed to make these projects more financially viable and sustainable in the long run.

Challenges and Opportunities Ahead

While the signing of this loan agreement is a significant milestone, South Africa’s Just Energy Transition journey will not be without its challenges. These include:

• Implementation Capacity: Ensuring that the funds are effectively utilized and that projects are implemented efficiently and transparently.
• Social Dialogue: Maintaining broad social consensus and managing the socio-economic impacts on coal-dependent communities.
• Grid Infrastructure: The existing grid, designed for centralized coal power, needs significant upgrades and expansion to accommodate distributed renewable energy sources. Over 14,000 kilometers of new transmission lines are expected to be built by 2032.
• Policy and Regulatory Certainty: Continued policy and regulatory reforms are essential to create an enabling environment that attracts further private sector investment. Eskom’s recent legal challenges against electricity traders highlight the ongoing complexities in market liberalization.
• Mobilizing Private Capital: While international partners provide crucial initial funding, attracting the full scale of private investment required for the transition remains a key challenge.

Despite these hurdles, the opportunities presented by the Just Energy Transition are immense. South Africa has abundant renewable energy resources, particularly solar and wind, which can provide a secure, clean, and ultimately more affordable energy supply. The transition offers a chance to modernize infrastructure, foster innovation, create new industries, and position South Africa as a leader in green development on the continent. By leveraging international partnerships and committing to comprehensive reforms, South Africa can transform its energy landscape, ensuring a resilient, sustainable, and equitable future for all its citizens.

This loan agreement with the AfDB is a powerful testament to South Africa’s unwavering commitment to this transformative journey and the international community’s recognition of its critical importance.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

30th July, 2025