The World Bank’s board has approved a $1bn development policy loan (DPL) to help South Africa reform its energy sector. The bank supports the government of South Africa’s efforts to promote long-term energy security and a low carbon transition, it said in a statement on October 25.

South Africa has been struggling with a crippling energy crisis which has negatively impacted the country’s economy and lives of its people. In 2022, electricity cuts, or load shedding, imposed by the national power utility Eskom averaged eight hours per day, costing 2-3% of gross domestic product growth.

The DPL endorses “a significant and strategic response to South Africa’s ongoing energy crisis, and the country’s goal of transitioning to a just and low carbon economy,” the bank said.

According to the statement, the operation supports reforms in two critical areas. First, it facilitates restructuring of the power sector through the unbundling of Eskom into three subsidiaries – transmission, generation and distribution – to aid the opening of the power market and improve Eskom’s efficiency.

Second, the operation supports a low carbon transition by encouraging private investment in renewable energy, including by households and small businesses, and strengthening carbon pricing instruments.

“This operation comes at a crucial time for South Africa as it will provide much needed fiscal and technical support, enabling us to pursue our policy priorities in the energy sector including easing the electricity crisis in the long term, stimulating private sector engagement and creating jobs in the renewables space,” said Mmakgoshi Lekhethe, head of asset and liability management at the National Treasury of South Africa.

Marie Francoise Marie-Nelly, the World Bank’s director for South Africa, said reforms the government had launched would “benefit the people of South Africa—particularly the most vulnerable households, —the economy, the environment, and advance the energy transition.”

South Africa, the bank said, was amongst the world’s top 20 greenhouse gas (GHG) emitters, with its energy sector representing 81% of these emissions, of which 45% comes from coal-based electricity generation. The operation would contribute to gradual reductions in water and air pollution, as a result of reduced reliance on coal for power generation.

The loan is also expected to enhance economic activity and job creation from new investments in renewable energy generation, with poor and vulnerable households being cushioned against recent increases in electricity tariffs. They will be supported through access to credit by commercial banks to enable them to invest in solar technology.

“This is anticipated to lead to substantial improvements in the quality of life of South African households in the long term. South African authorities will also receive technical assistance to identify future reforms necessary to manage the social costs associated with the decommissioning of coal-fired power,” the bank’s statement said.

The loan has been a collaborative effort between the World Bank, the African Development Bank (AfDB), KfW Development Bank (KfW), and the government of Canada and was based on South Africa’s development plans prioritised in the Energy Action Plan and the Just Energy Transition.