National Research Foundation Releases Report On Financing Dynamics
Achieving transformative change involves more than technological advancements; it requires structural adjustments in skills, infrastructure, regulations, cultural dynamics, and user preferences.
Financing plays a pivotal role in this process, shaping how funds are mobilised and distributed. However, despite growing attention to finance within transition studies, significant gaps remain, particularly in understanding and analysing financing rules.
In South Africa, these gaps are exacerbated by limited empirical research and the absence of robust frameworks to evaluate the role of financing systems in energy transitions. To address these challenges, a research study funded by the NRF investigates financing rules and their impact on South Africa’s renewable energy landscape, with a focus on green hydrogen as a promising niche innovation.
The study’s aims were to:
Explore how financing rules influence energy system transitions;
Analyse the interaction between niche innovations such as green hydrogen and existing financial regimes; and
Propose policy recommendations to foster inclusive and sustainable financing practices.
The research employed a critical realist case-study design which drew on 24 interviews conducted with financiers and innovators between July 2022 and July 2023. Participants included financing actors involved in renewable energy projects, as well as innovators engaged in green hydrogen activities. Additional data from policy documents, industry reports, and Government records supplemented the analysis.
The study categorised financing rules into five distinct domains:
Public financing: Government-led initiatives, such as those constrained by the Public Finance Management Act, face delays in decision-making which results in reductions in efficiency and adaptability.
Corporate financing: Dominated by banks, this domain prioritises proven technologies through risk-averse strategies which often sidelines innovative but untested projects.
Investment financing: Focused on portfolio diversification, this domain supports high-risk ventures in emerging markets but remains limited in scope and inclusivity.
International development financing: Heavily influenced by geopolitical agendas, this domain plays a significant role in niche development but may prioritise donor interests over local needs.
Philanthropic financing: Aims to address social and environmental challenges but often struggles with transparency and accountability issues.
The study highlights several systemic challenges that hinder financing effectiveness. Stringent compliance requirements reduce flexibility in financing mechanisms. Established networks dominate the financing landscape which marginalises new entrants and underrepresented innovators. Additionally, South Africa’s limited venture capital market restricts early-stage financing for emerging innovations, leaving gaps in support for high-risk ventures.
Research Policy Recommendations
Foster inclusivity: Broaden access to financing for diverse actors, including underrepresented innovators, by developing equity-focused mechanisms.
Strengthen institutional capacity: Improve governance within public and philanthropic financing systems to ensure efficient resource allocation and alignment with sustainability goals.
Expand venture capital: Increase private sector involvement in early-stage innovation financing with dedicated funds for green hydrogen research and development.
Promote systemic change: Develop long-term financing models that incorporate socio-technical perspectives and redefine innovation pathways to include environmental and social considerations.
The study underscores the critical role of financing rules in driving South Africa’s energy transition. Addressing systemic barriers in financing will be crucial to the success of South Africa’s renewable energy future.
