A brighter future for South Africa powered by liquefied natural gas?
28 Oct 2016
On 4 October 2016 the Department of Energy (DoE) released its Preliminary Information Memorandum (PIM) on its Independent Power Producer Procurement Programme (IPPP) for Liquefied Natural Gas (LNG). This exhibits Government’s clear commitment to weaning South Africa off its dependency on coal for power in favor of alternative, cleaner sources of energy, and thereby promoting energy security.
This is a welcome development for South Africans, who while experiencing a glad respite from rolling blackouts, are all too well aware of the challenges of power shortages associated with coal dependency. For example, a mere two years ago wet coal was blamed for a particularly virulent bout of load-shedding. The fact that LNG has more possible applications than the generation of power, namely direct heating, industrial uses (for example, in the manufacture of fertilizer and methanol) and transportation fuel (for use by inter alia LNG powered ships) highlights its potential to stimulate the South African economy.
The IPPP indicates a significant shift in the energy landscape, dominated by Eskom, a state owned enterprise, in that private entities will be invited to design, finance and construct the necessary infrastructure and thereafter have almost complete control over the operation of the facilities and supply of the LNG, subject to agreed tariffs. The model sensibly seeks to shift risk from Government to the producer. The scope of the project is vast and consortiums will probably need to be formed to ensure that a suitably qualified player manages each aspect of the chain, for example, LNG supply, terminal operation and power production.
It is envisaged that the LNG will be delivered to a Floating Storage Regasification Unit (FSRU) that receives the LNG from specially designed ships, heats up the LNG (which is in transported in cooled liquid form) and converts it to its gaseous state. The LNG will then be piped from the FRSU, which is typically berthed at some sort of jetty, island or similar structure in a harbor, to a power plant and gas distribution facility. A portion of the LNG supply (anticipated to be 5%) will be required to be allocated to external users via the distribution facility. Most of the LNG will be used to generate power, to be purchased by Eskom over a period of 20 years after commencement of operations. The Government will offer some support to the successful bidder, the extent of which is yet to be defined, in the event of default of Eskom.
Sites have been identified at the ports of Richards Bay (for a 2000 megawatt plant) and Ngqura, with the power plant in the Coega IDZ (for a 1000 megawatt plant). Bidders can bid for one or both of the projects. These plants would make a significant contribution to the national grid, considering that at peak demand in 2015, eThekwini Municipality required 1865 megawatts. Eskom’s biggest fully operational power plant, Majuba has a capacity of 3843 megawatts.
Richards Bay is considered as an ideal location for one of the plants, as it has a successful multi-purpose port specialising in the shipment of bulk commodities and it is only about 20km away from an existing pipeline running between Durban and Secunda, meaning that the pipeline could be extended to Richards Bay with relative ease. Furthermore, large manufacturers in the region, such as aluminum and titanium smelters, could drive demand for alternative energy solutions.
While the DoE will not necessarily be prescriptive about the use of the FSRU and power plant sites it has identified at Ngqura and Richards Bay, it has done pre-feasibility studies to choose the best possible sites, taking into account factors such as limitation of dredging costs and the availability of grid infrastructure. These studies will be made available to bidders, but bidders are expected to conduct their own due diligence studies and obtain or finalise all necessary permits.
The DoE intends to release a Request for pre-Qualification (RFQ) in November 2016. In terms of the RFQ process the prospective bidders must name all key equity participants and satisfy the DoE that they meet all financial and technical requirements. Bidders will be expected to ensure that there is at least 35% participation by South African entities, including State Owned Entities and a BBB-EE ownership scheme. Pre-qualified bidders will be allowed to provide feedback on the Request for Proposal (RFP) intended to be released in April 2017 and it is envisaged that the final RFP will only be released in August 2017, which indicates a high degree of willingness on the part of the DoE to be responsive to the commercial needs of bidders. Bidders will be required to pay R2,000,000 for the privilege of receiving the RFP, so the contenders will presumably be very serious bidders indeed.
One of the challenges that will be faced by bidders is that the co-operation of a multitude of stakeholders and Government players will be needed to make the project a success. These players include Transnet, the Department of Transport, Department of Environmental Affairs, Eskom and National Energy Regulator of South Africa who between them will be responsible for various concessions, licences, approvals and offtake. It has been reported that Eskom, who will be the principal customer of the power plants, has expressed reservations about the project, citing potential over-capacity. It remains to be seen if the DoE can spearhead an integrated Government response to maintain its investor friendly approach to the programme.
(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)