The Impact of Financial Development and Economic Growth on Renewable Energy Supply in South Africa

Abstract

Eskom’s power plants in South Africa face frequent breakdowns due to a lack of maintenance and increasing energy demand. The high dependence of South Africa on coal for power generation, which is a resource that significantly contributes to carbon dioxide (CO2) emissions that impact the environment negatively, could be reduced by considering renewable energy sources. Renewable energy supply, dependent on private sector funding and economic growth, is seen as a solution to energy and environmental problems. The study aimed to examine if financial development and economic growth impact renewable energy supply in South Africa and to discover if co-integration exists between these variables, including the variables defined as the determinants of renewable energy supply, namely: CO2 emission by coal power generation; secondly, coal electricity supply; thirdly, coal price changes; and lastly, load shedding levels. The research gap identified for the study is twofold. Firstly, there is a lack of research on the relationship between renewable energy supply, financial development, and economic growth, specifically in South Africa. Furthermore, the existing research on these variables in other countries has produced inconclusive results. Secondly, minimal research has been conducted on how economic growth impacts renewable energy supply in emerging markets. Thus, the present study sought to bridge the gap and contribute to the scientific body of knowledge related to the drivers of renewable energy supply. The autoregression distributed lag (ARDL) model was employed to test if economic growth and financial development have a statistically significant impact on renewable energy supply, as well as to test the direction of the relationship, for an observation period from 1990 to 2021. The results proved that financial development and economic growth were reported to have a statistically significant positive impact on renewable energy supply in the long run and the short run. A study on the relationship between financial development, economic growth, and renewable energy supply in South Africa can influence policy reforms and assist the National Energy Regulator of South Africa (NERSA) and the government in developing and implementing renewable energy policies that encourage the deployment of renewable energy infrastructure to increase renewable energy supply, particularly regarding factors associated with addressing challenges in financial development and economic growth.