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.
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:
The project aims to build a hydrogen-based direct reduced iron (H2-DRI) plant to pilot a novel technology, install solar PVs to increase supply of clean power for steel production, and scale hydrogen production to enable subsidised and reliable green hydrogen to steelmakers. The project aims to address critical barriers to the adoption of green steel technology in South Africa. The project expects to reduce steel industry emissions to meet NDC’s and net-zero targets, increase export competitiveness, participate in global trade (comply with CBAM and other ETF’s), and create new low carbon products for end-user industries like automotives. Moreover, co-benefits are clear, highlighting the country’s potential to increase export and position South Africa 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 Financial Cooperation (FC) involves a combination of several blended finance instruments. These include CAPEX grants to reduce investment costs and accelerate investment in a H2-DRI pilot plant and a H2 plant. The financing of the H2-DRI plant will also be supported by concessional loans. The Loan Guarantees include credit risk guarantees for long-term debt financing for green steel and green H2 producers. The off-taker guarantees for a green electricity PPA with steel makers.
The Technical Cooperation (TC) will be focusing on policy framework enhancement, building on the framework for industry’s net-zero transition in South Africa, including developing policies such as sustainable public procurement, quotas, labels, and recycling standards for steel. The project will also undertake capacity building and awareness raising activities for stakeholders regarding low-carbon steel. The project will aim to facilitate a technology transfer by promoting the adoption of electric arc furnaces (EAF) for secondary steelmaking as a sustainable alternative. The project will strive to create a gender responsive environment and promote equal participation of women.
Mitigation Potential and Long-Term Impact:
The project is expected to directly mitigate the emissions of 539,419 tCO2e over the course of the project. Over the course of the project PLUS ten years after project end, it is expected that the project will mitigate 1,702,739 tCO2 and over the technology lifetime 30,209,938 tCO2e. Therefore, the cost-effectiveness of the project would be 14.7 EUR/tCO2e.