3 000MW Gas to Power program reaches milestone

The department of energy on Monday night issued the policy document for liquefied natural gas (LNG) to power Independent Power Producer (IPP) program upon which the procurement of two projects totalling 3 000MW will be based.

In terms of the procurement timetable the final Request for Proposals (RFP) might be issued in August next year.

A summary of the Preliminary Information Memorandum (PIM) was distributed on Monday night at the Gas Options conference in Cape Town, but the full PIM will be published on the department’s website on Tuesday. It will also be discussed in detail at the conference which brings together local and international investors, funders, and other industry players as well as representatives of government and regulators.

A separate procurement process will be undertaken for each of the two identified sites, namely for 1 000MW at Coega in the Eastern Cape and 2 000 MW at Richards Bay in KwaZulu-Natal. It will require an integrated development by a single private sector special purpose vehicle (SPV) for each project. The SPV will be responsible for the design and development of the marine and land-based infrastructure, including the funding and the supply of LNG.

LNG will be transported by sea to the respective harbours at Couga and Richards Bay, where it will be regasified at plants to be constructed for that purpose and then transported by pipeline to the new power stations.

According to the PIM the availability of regional gas may play a significant role in complementing LNG imports. South Africa is currently importing natural gas from Mozambique.

Although the potential of finding significant gas resources South Africa seems great, it still requires significant exploration and license holders will have to make big investments to develop such resources. This is a long-term objective.

The department states that the successful bidder will develop the project and take all reasonable construction, operational and commercial risk.

Bidders who are pre-qualified will have the right to submit binding offers for:

• LNG procurement and delivery;
• LNG storage and regasification;
• Port infrastructure;
• Gas transmission pipelines to the new power station;
• LNG or gas distribution hubs for third party off-take;
• Power plant, including connection to the grid;
• Arrangements for independent delivery of LNG and sale of a small quantity of gas or LNG to external clients.

The department will be the procuring agency and Eskom will by the buyer through a 20-year Power Purchase Agreement (PPA). A small percentage of the gas will be available to external clients and government hopes to leverage the gas-to-power project to develop a commercial and residential gas market.

Based on studies by the department the demand for LNG in KwaZulu-Natal is estimated to be 0.2 million tons per annum (MTPA) within five years, 0.6 MTPA within 5-10 years and 3.1 MTPA beyond ten years.

In the Eastern Cape it is estimated to be 1.3 MTPA within five years, 1.5 MTPA within 5-10 years and 3.9 MTPA beyond ten years.

Bidders will be required to set aside at least 35% equity for local partners, including state-owned companies to be named and a broad-based share ownership scheme.

The department earlier indicated that the project might be based on a 35% load factor for the power plants. That means that it will require output from the plant for 35% of the day on average.

That was probably stated against the background of a need for the projects to support intermittent supply from renewable IPPs. Delegates Moneyweb spoke to were concerned that such a low load factor might require very high tariffs to ensure the commercial viability of the project.

The department does not in the PIM state the required load factor, but says the agreements will have to be flexible to provide for the expected growth in the gas market. The Request for Qualification (RFQ), which will be issued in November, will provide further detail. The department however states it is “cognisant that a minimum volume of gas will have to be used to ensure viability of the gas value chain”.

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