Gas represents a R250bn opportunity for South Africa – McKinsey

1st September 2015 By: Terence Creamer - Creamer Media Editor

Gas represents a R250bn opportunity for South Africa – McKinsey

McKinsey & Company principal Christine Wu
Photo by: Duane Daws

Global management consultancy McKinsey & Company argues that South Africa should urgently pursue a ‘big gas’ energy option to bridge an electricity supply gap of between 6 GW and 10 GW that could arise by 2025 as older coal-fired power stations are decommissioned.

The recommendation is contained in a country-level report titled ‘South Africa’s Big Five: Bold Priorities for Inclusive Growth’ published on September 1 and released as part of McKinsey’s twentieth anniversary in South Africa and the twenty-fifth anniversary of the McKinsey Global Institute.

Releasing the report in Johannesburg, coauthor Christine Wu said, with up to 14.4 GW of capacity planned for decommissioning between 2020 and 2030, natural gas could be introduced with a significantly shorter lead time than would be the case for either new coal or nuclear.

The completion of the Medupi and Kusile power stations would add nearly 9 600 MW of capacity when the plants eventually entered commercial operation in the early 2020s, with only the 794 MW Medupi Unit 6 having been introduced into the national grid to date.

“Gas could play an important role in South Africa’s energy portfolio, particularly in terms of meeting the country’s base-load energy needs between 2020 and 2030, before more diversified capacity comes into operation,” Wu explained. Large-scale coal plants had a lead-time of around eight years and nuclear plants even longer.

She added that the development of a natural gas industry could also boost South Africa’s gross domestic product (GDP) by between R138-billion and R251-billion by 2030 and create up to 328 000 direct and indirect jobs.

However, to take advantage of the opportunity, government would need to finalise regulations to stimulate offshore and onshore exploration, as well as to facilitate the importation of liquefied natural gas (LNG).

The Integrated Resource Plan (IRP) for electricity, which was currently relatively light on gas, would also need to be updated.

“First, the IRP, which already makes provision for a big gas case, will need to be amended once the potential growth of gas as a power source is clear. Second, the Department of Energy could consider establishing an independent power producer unit for gas power, drawing on its experience of the renewables independent power producer unit,” McKinsey argued.

Energy Minister Tina Joemat-Pettersson indicated just ahead of the report’s official release that gas was an “immediate focus” for government and indicated that work was under way to finalise the long-awaited Gas Utilisation Master Plan, which would offer a road map for South Africa’s development of a gas industry.

“The scale of the opportunity for gas use in South Africa is immense, with demand from the power sector alone possibly reaching one-trillion cubic feet,” the McKinsey reported stated. The were a number of emerging supply options, including shale gas, offshore gas, coalbed methane, LNG imports, and unexploited gas resources in Mozambique.

But significant capital would also be required, with an initial R4.4-billion needed for an LNG terminal at Saldanha Bay and a further R4.1-billion rand in pipelines to connect the terminal to nearby sources of demand.

This could be followed up by domestic drilling and development programmes, as well as the addition of new pipeline networks to link areas of demand with both domestic and regional gas sources.

Besides “harnessing natural gas for power generation and industrial development”, the report listed the following four other opportunities as part of its ‘big five’ vision:

Wu said that, if fully pursued, the opportunities could reignite South Africa’s growth, add over R1-trillion rand to annual GDP by 2030 and create over 3.4-million jobs.

“But it is important that we start to create a new partnership between the public and the private sectors so that we can support each other in capturing these opportunities. These opportunities are all challenging and none of them are easy, but they are perfectly within our grasp to capture,” Wu concluded.