Introduction and Background:
South Africa is the second largest steel producer in Africa after Egypt. The sector is strategically important in supplying materials to key domestic and export markets including automotive, construction and mining, and at the same is vital for local employment. The country’s steel industry however faces significant hurdles, including heavy reliance on coal and infrastructure bottlenecks, impeding its growth and competitiveness. The steel sector is the country’s 2nd largest emitter of GHG-emissions after the energy sector. With carbon intensity double the EU average, a substantial transition to low-carbon production is crucial.
The project aligns with South Africa’s NDC and low-carbon strategies. South Africa’s 2021 updated NDC commits the country to a 31% reduction in greenhouse gas emissions and to reach net zero emissions by 2050. The Just Energy Transition Investment Plan sees the country move towards renewable energy uptake. Efforts have begun in the industrial sector, with the 2023 Renewable Energy Masterplan focusing on driving industrial development and creating inclusive jobs.
Project Goals and Approach to Transformational Change:
This project “Accelerating South Africa’s Steel Decarbonization” aims at addressing critical barriers to adoption of green steel technology in the country through a comprehensive, multi-stakeholder approach. It promises to catalyze policy development, support technology uptake, enhance access to finance, and build capacity of key stakeholders along the value chain. The project expects to reduce steel industry emissions to meet NDC’s and net-zero targets, increased export competitiveness and participate in global trade (comply with CBAM and other ETF’s) and create new low carbon products for end-user industries like automotives.
The projects will address multiple challenges including high investment and operational costs for low carbon steel and H2 production, limited financial support structure dedicated to incentivizing investments in near-zero-emission steel technologies, limited availability of renewable energy and green hydrogen for green steel production as well as still unfavourable policy and regulatory environment.
Specifically, the project will facilitate building a hydrogen-based direct reduced iron (H2-DRI) plant to pilot a novel technology, installing solar PVs to increase supply of clean power for steel production, and scaling hydrogen production to enable subsidized and reliable green hydrogen to steelmakers. To achieve this, the project provides a combination of multiple financial instruments which will reduce capital expenditures (CAPEX) through grants, operating expenditures (OPEX) through hydrogen price subsidies, and financing costs through guarantees and interest rate subsidies. By this way the project seeks to enhance the bankability of this novel technology. As adoption grows and economies of scale develop, costs are expected to decrease, enabling a gradual phase-out of subsidies.
By fostering policy development, reducing financial barriers, raise awareness and building capacity, the project has the potential to catalyze green steel adoption in South Africa. Moreover, co-benefits are clear, highlighting the country’s potential to increase export and position SA in the global steel market, creating wider impact on the country’s economy and green job creation. The project will consider gender equality and social inclusion aspects during the transition process.
Project Components and Support Mechanisms:
The MAF project will support overcoming multiple barriers with a combination of technical assistance & tailored financial mechanism for the steel industry and other stakeholders along the value chain, including steel producers, green electricity producers and green hydrogen producers.
Financial Cooperation (FC) considers tailored support and combination of several blended finance instruments, which will be further developed on need-based approach:
- CAPEX grants to reduce investment costs and accelerate investment in 1) aH2-DRI pilot plant for green steel production and 2) H2 plant for green hydrogen production to supply a DRI plant.
- Concessional loans for a H2-DRI plantto reduce cost of financing.
- Loan Guarantee includes credit risk guarantees for long-term debt financing for green steel and green H2 producers.
- Off-taker guarantee for a green electricity PPA with steel makers.
Technical Cooperation (TC) will be focusing on:
- Policy framework enhancement, building on the framework for industry’s net-zero transition in South Africa, developed with support from the OECD and the South African Steel and Metal Fabrication Master Plan. Measures include, but not limited to developing policies such as sustainable public procurement, quotas, labels and standards as well as recycling standards for steel.
- Capacity building: developing skills of stakeholders related to decarbonization of steel and its mitigation potential.
- Awareness raising: the project will develop comprehensive awareness materials to educate stakeholders about circularity and low carbon steel manufacturing.
- Technology Transfer: the project facilitates technology transfer by promoting the adoption of electric arc furnaces (EAF) for secondary steelmaking as a sustainable alternative to fossil fuel-based methods e.g. developing their green steel transitions roadmaps.
- Gender Equality: to facilitate gender equality, the project will ensure inclusivity in capacity building and awareness activities. It will promote equal participation and engagement of women in training programs, workshops, and decision-making processes. The project will strive to create a gender responsive environment that addresses the specific challenges faced by women in the industry, fostering gender equality and empowerment throughout the project’s implementation.
Mitigation Potential and Long-Term Impact:
Complete transition to H2-DRI can result in 97% reduction of process emissions. Currently steel production is very emission intensive with an average emission intensity of 2,74 tCO2/t of steel.
Projected direct emission reductions (as estimated during IDA):
- over the course of the project (cumulated): 539,419 tCO2e.
- over the course of the project PLUS ten years after project end (cumulated): 1,702,739 tCO2e
Projected direct emission reductions (as per Outline):
- over the course of the project (cumulated): 118,241 tCO2e.
- over the course of the project PLUS ten years after project end (cumulated): 9,911,345 tCO2e.
- over technology lifetime: 30,209,938 tCO2e.
Cost-effectiveness: 14.7 EUR/tCO2e