A group of the world’s richest countries has offered guarantees on South Africa’s debt under the proposed $ 8.5 billion deal to reduce the country’s dependence on coal for electricity, people familiar with the talks said it could potentially solve one issue in the talks.

The guarantees would allow South Africa or companies such as the state-owned energy company Eskom to borrow the money needed to shut down coal-fired power plants and ensure renewable energy production, one man said. People were asked not to name them, as the talks are not public.

Such an agreement would ease pressure on the South African government to guarantee any Eskom debt that may be needed to fund the transition to renewable energy, the man said. By March of this year, the National Treasury had issued guarantees to state-owned companies for 560.1 billion rupees ($ 35 billion), with Eskom accounting for about 79% of that amount.

Preferential loans and grant funding will be included in the support announced at the COP26 climate summit last year, and may be extended for the next three to five years. The deal is funded by the United States, Britain, Germany, France and the European Union.

In addition to funding the Eskom transition, part of the money could be used to strengthen South Africa’s power grid and compensate for coal-dependent communities when power plants close. The government also wants to use some of the money to start its green hydrogen and electricity industries.

Eskom and the EU declined to comment. The South African Treasury Department and the UK COP division did not immediately answer questions. Representatives of the US Treasury Department and the office of the US President’s Special Representative for Climate Change, John Kerry, did not respond to requests for comment.

The proposal seems to be a last-ditch attempt to avoid an increase in South African state commitments. If successful, it could support efforts to halt the downward trend in the country’s debt rating, which is rated below the investment rating by the world’s three largest rating companies.

Eskom, which has a debt of 416 billion rupees, is considering offering the government to take loans and transfer those funds to shares in utilities if needed, a person familiar with the company’s views said in March. South Africa is the 13th largest source of greenhouse gases in the world, with about two-fifths of its production coming from Eskom.

Eskom’s direct loans from partner countries will require guarantees, said the head of the government’s negotiating team Daniel Mminele in an interview with South African website News24, published on Thursday.

© 2022 Bloomberg

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