Simphiwe Mehlomakulu, Executive Chairman of Reatile Group, discusses the importance of gas in Africa’s power sector, as well as the challenges that need to be overcome in order to monetize gas.
What role do you see gas playing in the future development of Africa’s energy sector?
Gas is the energy of the future. It is clean and easy to use, and relatively efficient when compared with some other energy sources.
As the South African economy grows, so will demand for electrical power. Gas can contribute as a power source. The gas-to-power plans from the IPP (Independent Power Producers) at the Department of Energy are developed, but we are still awaiting the RFP (Request for Proposal) that was due in November 2016.
Obviously the two main constraints at the moment are access to sufficient quantities of gas, be it natural gas, methane rich gas or liquefied natural gas (LNG), at a price that would encourage use in the market place; and the infrastructure to get the gas to the final end user. Compressed natural gas (CNG) can play a very important role in this market, but distance and transport costs also play a major role in the supply of this clean energy.
The latest Integrated Energy Plan needs to be finalized as soon as possible. The GUMP (Gas Utilization Master Plan) has been eagerly awaited, but has not materialized. The lack of actual available molecules may be responsible for the hesitation to commit to the use of a product that is not yet freely available in South Africa.
Africa has sunshine, and as such solar power, which is getting cheaper and cheaper each year, during daylight hours is becoming more popular. Gas power generation after dark would complement solar power and allow for ‘off grid’ industries to develop.
What do you see as the challenges for monetizing gas in Africa, and how can these challenges be overcome?
South Africa, with its abundance of coal and history of cheap electricity, has never been educated in the advantages and subsequent use of gas. Domestic households tend to be frightened of gas and industrial users of power have not considered its use due to unavailability in many areas and product quantity restrictions. This need to be addressed.
There needs to be more communication and planning within the various government departments and state-owned enterprises and with the commercial businesses in South Africa. Government may set policies, but it is the business sector that must make them work.
The biggest challenge is infrastructure development to cover the huge distances between where the gas would be available, either imported by ship or by pipeline from new fields in Northern Mozambique, to where it is required. These high costs could, initially, give low financial returns. Low or even interest-free loans/grants for infrastructure development could be made available to allow companies to develop into the market. Certain financial facilities consisting of grants and loans are available through the Department of Trade and Industry, but are these enough to ‘kick start’ an industrial power revolution? The process of qualifying for and obtaining these loans/grants needs to be simplified and sped up.
Countries such as Nigeria, Ghana, Kenya, Tanzania and Mozambique, amongst others, all have the ability to produce gas from local resources. Rather than just exporting the raw material, this could be put to local use and develop industries in those countries to the benefit of the local populace. Industry and commerce would generate greater employment and tax revenue than just exporting the commodity allowing for education and people development.
What are the obstacles to accessing equity to fund gas-projects in Africa? How can these obstacles be overcome?
As pointed out earlier, one of the major stumbling points for gas projects in South Africa is cost. Funding has to come from overseas and repaid overseas whilst the final product, electricity, is paid for in Rands in South Africa. Volatility of the Rand against major foreign currencies is of concern, as are local interest rates. Most developed countries have stable economies and low inflation levels, and thus can loan monies at lower interest rates. South African financial institutions are not in that fortunate position and economic instability is a fact of life.
It is not logically feasible to ‘hedge’ foreign currency loans and working capital (gas itself) for in excess of 20 years. Therefore, mechanisms need to be in place that the central government will guarantee the repayment of loans and accept swings in the exchange rates for the operating costs of gas during the period of operation of the power plant.
Electricity produced from coal is Rand-based, as the mines and the coal are already in South Africa. Gas, under the current situation, needs to be imported and is therefore at the mercy of exchange fluctuations.
The National Energy Regulator (NERSA) would need to build in mechanisms that would allow for this volatility when approving price and tariff applications.
There is the need for a combined and clear stance required between the Department of Energy (advocating Renewable Energy and Gas to Power) and ESKOM (advocating Nuclear Power) that will give investors comfort going forward.
Simphiwe Mehlomakulu will be joining us for our Policy and Law panel at AOP 2017. Take a look at our other speakers and get your delegate pass here.