South Africa’s response to the gas-supply cliff, which will arise as supply to industrial users from Mozambique falls away later this decade, should be treated separately from the country’s moves to shore up electricity supply as coal stations are decommissioned, because conflating the two will result in sub-optimal outcomes.

This argument, which runs counter to the prevailing policy response, is being advanced by Naimon Capital executive director Roland Tatnall, who has 25 years of experience across the energy value chain, including as Exxaro’s one-time energy MD, as well as as an investor and adviser.

He tells Engineering News & Mining Weekly that the current approach of using gas-to-power (GtP) plants at capacity factors above 50% to anchor liquefied natural gas (LNG) imports in order to also provide cheaper molecules to industrial users is flawed. This is because, even if the scale of those imports lowers the unit cost of regasified molecules for industrial users, his analysis indicates that it will still fail to deliver gas at prices that are commercially viable for most industrial consumers.

The conflation has occurred largely because two supply problems have arisen simultaneously: the imminent halt of gas supply from Sasol’s Pande and Temane gas fields in southern Mozambique to industrial consumers mostly in Gauteng and Mpumalanga, and the scheduled retirement of several Eskom coal power stations.

Policymakers believe LNG imports to be the answer to both “cliffs”, Tatnall explains. Firstly, to sustain supply to industrial users that collectively consume some 60 PJ of gas yearly, and also to fuel proposed GtP plants to partly cover any shortfall that could arise when 8 GW of coal capacity is decommissioned in the early 2030s.

The shape of the ‘power cliff’ component will be heavily influenced by the review Eskom is currently undertaking of its coal decommissioning schedule, with the State-owned utility likely to announce a delay to the schedule this month.

From an electricity perspective, Tatnall believes, the conflated solution will prevent GtP plants from playing the flexible role required in a power system increasingly supplied by variable renewable generators. That role involves deploying relatively expensive gas-fired electricity mainly as a gap filler and to provide ancillary services previously supplied by coal stations.

Operating such plants, which could initially include 2 GW of independent power producer GtP stations and a 3 GW Eskom plant in Richards Bay, at mid-merit or even base-supply profiles would crowd out cheaper electrons, increase curtailment and raise electricity tariffs at a time when affordability has emerged as a major challenge.

Commercial Viability in Doubt

More significantly, however, Tatnall questions whether imported LNG is a commercially viable solution to the supply problem being faced by the majority of the country’s industrial gas users, which use gas as a process input for everything from steel and glass to ceramics, automobiles, fertilisers and food and beverages.

“For me, the question is whether the proposed remedy is actually solving the problem. Certainly, from a volume perspective LNG can meet the requirements, but it is far from certain that such imports can be delivered at a commercially viable price point.”

In his view, imported gas would, in the majority of cases, be too expensive to sustain competitive domestic production relative to import competition, as there would be limited buffers in place to move from a gas price of about $8/MMBtu currently to between $12/MMBtu and $15/MMBtu inland to Gauteng and Mpumulanga, where most demand is currently concentrated.

“We already know that Sasol, which consumes about 120 PJ of the 180 PJ imported yearly from Mozambique, says it will not be able to produce its fuels and chemicals competitively using imported LNG.

“While some industrial users could absorb or pass on the higher costs of LNG to customers, the majority of them have very little scope to do so. These companies will need to find energy substitutes, such as coal or electricity. Alternatively, they will either require support from government that allows them to continue producing using LNG, or begin importing,” Tatnall argues.

There is still a case, in his view, for importing LNG to produce electricity, given that GtP plants offer the flexibility required as variable renewable generation increases and coal capacity is retired.

However, the focus should be on using such plants optimally rather than tying consumers into inflexible 25-year power purchase agreements akin to those that were eventually abandoned in relation to power ships during South Africa’s loadshedding emergency.

“South Africa is installing GtP as insurance not because it’s the cheapest solution,” Tatnall explains, likening it to an urban dweller who buys a car mainly for its utility and its flexibility to do short or long journeys, not primarily for its fuel consumption.

Under such a scenario, pursuing the scale needed to lock in long-term contracts in a bid to secure prices below those of the spot market may not make sense, as the aim would be to run the expensive GtP plants as little as possible.

Even if the fuel purchased on the spot market is double the price, the savings would be material if the plants operated at a capacity factor of 15% a year rather than one that had been artificially elevated so as to anchor demand to reduce the gas price for an unrelated activity.

“As soon as you separate the gas cliff and the power cliff, you soon see that solving one problem does not causally solve the other.”

By treating them as separate challenges, Tatnall believes government and industry will be freer to optimise the responses for each, rather than seeking to use one intervention to resolve two materially different problems.

Given the urgency for industrial gas users, Tatnall believes the debate needs to advance speedily to a point where there is transparency in relation to the gas demand curves of affected industries when the price point of imported LNG is used.

If that shows that the majority of industries will be unable to operate commercially using imported LNG, policymakers could then assess whether these companies should be supported to transition to alternatives, or whether they should be subsidised.

In parallel, he believes greater policy emphasis should be given to exploring and developing indigenous onshore gas exploration projects that could potentially supply gas at a lower cost than imported LNG.

These resources may ultimately scale to underpin both industry and GtP but need support to do so, just as they received in the US. Tatnall believes that even if pilot volumes can be produced below the cost of imported LNG, it could potentially help stimulate further investment to meet industrial gas demand over time.