The World Bank approved a $3.75bn loan to Eskom late yesterday evening.
The bank said that the loan was brought about by unique circumstances including South Africa's energy crisis of 2007 and early 2008, and the global financial crisis that exposed the country's vulnerability to an energy shock and severe economic consequences.
In a statement Obiageli K. Ezekwesili, World Bank Vice President for the Africa Region said that without an increased energy supply, South Africans will face hardship for the poor and limited economic growth.
The loan is the Bank's first major lending engagement with South Africa since the fall of apartheid 16 years.
In approving the project, the World Bank Board of Executive Directors noted South Africa's achievement in increasing energy access from around 30% of citizens to more than 80% since the fall of apartheid in 1994 and noted its Free Basic Electricity policy that provides 50 kilowatt hours (KWh) of free electricity per month to poor families.
climate change mitigation and adaptation.
The bulk of the loan - $3.05bn - is to go towards constructing Eskom's Medupi coal-fired power station in the Limpopo province while $260m has been earmarked for investment in renewable energy and $485m will be used for investment in low-carbon efficiency components, such as road to rail coal transportation.
The loan was granted despite strong opposition from environmental lobby groups and the decision by the US, the UK and the Netherlands to abstain from voting in favour of the loan.
The three countries abstained from voting because of "environmental concerns".
The US said the Medupi power station - on which the bulk of the loan will be used - did not comply with the bank's requirements.
The abstentions are a slap in the face for SA's government, which has lobbied extensively for the loan and made the decision a close call despite earlier reports the bank's board was expected approve the loan.
In a letter to World Bank president Robert Zoellick last month, US senators questioned the loan.
The US Treasury said last night it was concerned about the effects on climate of the proposed 4800MW Medupi coal-fired power station. Just more than $3bn of the loan will fund the power station in Limpopo.
"We recognise that SA faces limited options that could provide the required energy base for SA and the region in lieu of the project, and that there is a lack of alternative private financing options in the wake of the financial crisis," it said.
The US is the biggest shareholder of the Bank.
The Treasury acknowledged that failure to commission additional base-load capacity would hamper SA's economic recovery.
"Despite these benefits, the US is concerned about the project since it would produce significant greenhouse gas emissions, and uncertainty remains about future mitigation efforts," it said.
The Treasury also questioned Medupi's compatibility with the bank's requirements. It said, without actions to offset carbon emissions from the Medupi plant, the project contradicted the bank's strategy to help countries achieve economic growth and reduce poverty "in ways that are environmentally sustainable".
It said it had held discussions over several months with the bank and the South African government to address its concerns.
A Dutch foreign ministry spokesman said yesterday the Netherlands would abstain because of lack of progress in developing renewable energy. $260m of the loan is earmarked for 100MW wind and 100MW concentrated solar power plants, while $485m will be used for low- carbon energy efficiency and power plant efficiency improvements.