Investment by the government and private sector in a gas-to-power industry could be a costly mistake that may delay the transition to renewable energy, the International Institute for Sustainable Development (IISD) has warned.
The IISD is an independent think-tank that produces research aimed at informing international policy on sustainable development governance.
According to the IISD report, there are strong indications that SA is “potentially on the verge of a gas investment flurry that could prove to be a very expensive mistake”.
The National Business Initiative recently released a report, “The Role of Gas in SA’s Path to Net Zero”, the central finding of which is that gas could play an important role in the just transition to renewable energy.
SA’s Integrated Resource Plan (IRP) 2019 for electricity infrastructure development envisages 3,000MW of gas-fired power plants by 2030. But there are already proposals for gas-to-power projects on the table that would put the country’s capacity for electricity generation from gas at about five times this target.
In March, there were proposed gas-to-power projects of at least 14,000MW, equivalent to 36% of the nominal capacity of Eskom’s coal fleet, or 2.8 times the operational utility wind and solar capacity.
“Of these projects, if the 9,500MW of onshore gas plants were built near three ports with [liquefied natural gas] import terminals and pipelines, the construction costs could be over R184bn,” the report reads.
Speaking at the launch of the report, IISD policy adviser Richard Halsey said some renewable energy alternatives are improving rapidly and are cheaper options than gas, indicating that gas-to-power solutions to SA’s energy needs would be a short-lived industry and would ultimately face a similar future to coal.
In addition, he said, modelling of the SA electricity system shows that gas-fired supply will not be technically necessary until at least 2035, and given the emergence of new power solutions, it is likely there will never be a need for SA to generate much electricity from gas.
Halsey said there used to be a rational view that fossil gas would be necessary either during a transition to low-carbon energy or as part of the long-term energy mix for electricity production. But revolutions in renewable energy costs and battery storage costs have upended this view. The risks associated with gas have simultaneously increased.
SA may see significant negative outcomes from developing a large gas-to-power system now, he said. “Investment in gas can reasonably be expected to lead to higher costs for consumers, just transition challenges for workers and losses for investors,” the report reads.
One of these risks is the high likelihood of new gas-to-power investments becoming stranded assets. They could suffer from unanticipated or premature writedowns, devaluations or conversion to liabilities, with investors or governments unable to recover their investments. Some of the factors that could lead to stranding include new regulations about the impact of the asset on the environment, changes in the availability or price of the fuel and the falling costs of alternatives.
According to the report, gas-to-power infrastructure is becoming stranded in India, where the government has had to write off investments related to 60% of gas-fired capacity.
Peter Attard Montalto, head of capital markets research at SA consultancy and research company Intellidex, said the risk of stranded assets in the gas-to-power industry was an issue the SA Reserve Bank had already started discussing with banks. “This is a real challenge for investors, because it seems likely SA’s energy policy will go in the direction of gas,” he said.
Eskom, for example, has indicated that about 20% of its future electricity supply would have to be from gas. In addition, a gas master plan is being developed and the government has indicated the need for a new IRP that would include gas in the energy mix to a greater extent, Montalto said.
The IISD suggested that a decision on the future requirement for gas should be revisited in about 2030. Meanwhile, a moratorium should be placed on the development of the sector.
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