Article Republished By Javier Troconis
By Kelly-Ann Mealia, co-founder and president of Energy Capital & Power (www.EnergyCapitalPower.com)
As South Africa underwent Stage 4 load shedding last week, state-owned utility Eskom announced plans to issue a request for proposals (RFP) for gas supply to open-cycle gas turbine power plants ( OCGT) from Ankerlig and Gourikwa in the Western Cape province. The power plants, which generate electricity from diesel, currently operate during peak periods and for emergency purposes only. South Africa has experienced load outages since 2008, where electricity supply is deliberately interrupted as a measure to prevent the total collapse of the national grid, and more recently has over 15,000 MW of total unplanned outages.
The announcement comes at a critical time in South Africa’s gas expansion agenda. Natural gas is not only positioning itself as the solution for a constrained grid, but also as a transition fuel away from coal, which accounts for more than 85% of domestic power generation and ranks the country as the 14th largest emitter of gases greenhouse effect worldwide. Within its Integrated Resource Plan, the South African government has targeted gas technology for the generation of 6,000 MW from combined cycle gas turbines, of which 3,000 MW will come from LNG to power, 726 MW from gas to power and 1500 MW of unspecified gas. Domestic demand for gas is expected to double by 2040, driven largely by the power generation sector, in which gas is expected to increase its share from two percent of the power generation mix in 2020 to eight percent in 2040.
While climate activists have called for the complete removal of fossil fuels from national energy mixes, South Africa and its leaders argue that natural gas, as a relatively clean-burning fuel, is not only an integral part of the country’s economic growth, but also of its capacity. to implement a sustainable energy transition. Speaking at Investing in African Mining Indaba 2022, President Cyril Ramaphosa stated that the continued exploration and development of South Africa’s oil and gas resources remains critical to achieving energy security, fostering social and economic development and eradicating poverty. energy poverty, as well as allowing the transition of the country towards a future with low or zero carbon emissions. Natural gas, for example, can be used as a feedstock for the production of agricultural chemicals, methanol, ethylene, propylene, and a wide variety of petrochemicals used in refining and manufacturing processes. Allowing South Africa to tap into its own hydrocarbon resources in the form of natural gas liquids and naphtha would be transformative for a country in need of massive industrialization, job and wealth creation, and economic diversification.
However, South Africa’s path to gas-to-electricity has not been smooth sailing. For one thing, the country currently lacks a large or reliable enough domestic gas supply to power its energy transition on its own. While recent offshore gas discoveries, including the Brulpadda and Luiperd prospects, have shown promise, along with pockets of shale gas in the Karoo Basin, the country’s estimated 60 trillion cubic feet of natural gas reserves remain have not been put into production. Meanwhile, South Africa imports more than three-quarters of its natural gas supply by pipeline, from neighboring Mozambique, which is also facing supply shortages. In short, establishing new gas import and distribution infrastructure, or developing from scratch LNG facilities and domestic gas-to-power capacity, would require significant amounts of capital.
Eskom’s RFP for the supply of gas to its OCGT plants presents similar financial constraints for interested parties. Historically, financing large-scale gas development projects in sub-Saharan Africa has been difficult due to a shortage of creditworthy buyers, or few entities able to purchase the power, as well as limited government support and a lack of guarantees. In addition, Eskom has indicated that it plans to continue operating OCGT plants below capacity, which would decrease the profitability of potential power producers. As a result, the national utility has expressed interest in implementing a Public-Private Partnership (PPP) or Independent Power Producer model for power plants to help raise capital and use innovative financing mechanisms. The success of PPPs in South Africa has already been proven through the country’s Renewable Energy Independent Power Producers Procurement Program, which leverages public-private partnerships to achieve clean energy goals. Consequently, public sector involvement can provide a degree of long-term government support, while the private sector’s technical knowledge, experience, and free-market advantage drive projects to be more bankable.
Finally, Eskom faces regulatory hurdles in advancing gas-to-power projects. While South Africa is one of the few sub-Saharan African markets with a designated Gas Master Plan that aligns policy with investment strategies, these projects are likely to exceed the 100 MW maximum for integrated generation projects that can proceed without a license. Therefore, some regulatory adjustments will be required to facilitate gas-to-power generation, either by decommissioning and converting existing coal-fired power plants or building new greenfield projects. As a result, Eskom’s request for gas supply bids for its OCGT plants must adequately address regulatory concerns and provide financial backing for power producers, if one of the fastest growing markets in Europe is to be successfully transformed and electrified. the continent.