The Development Bank of Southern Africa (DBSA), which has been a major supporter of the government’s procurement of renewable energy from independent power producers (IPP), says it is ready to support new procurement rounds, including for gas-to-power projects.
However, the ability of projects to prove they have reliable, secure access to gas supply will be critical.
The DBSA, owned by the government, has a mandate to finance sustainable infrastructure in SA and elsewhere in Sub-Saharan Africa. Much of its focus has been on the energy sector, which accounts for about 40% of its R110bn in assets, said Mohan Vivekanandan, the DBSA group executive for client coverage.
Through its partnerships with the department of mineral resources & energy and the IPP Office, the bank has committed about R18bn across the renewable energy IPP bid rounds.
Now it is “standing ready” to support the latest three bid rounds launched at the end of last year. These include 5,000MW of renewable energy and 615MW of battery energy storage, as well as the department’s inaugural round of gas IPP procurement of 2,000MW from gas-to-power projects.
This could be the first of many rounds of state-backed gas power procurement. These recent bidding rounds were issued in alignment with ministerial determinations in the 2019 Integrated Resource Plan (IRP), which provided for 3,000MW new generation capacity from diesel and gas by 2030.
However, the draft IRP 2023, now out for public comment, has greatly increased the scope for gas-to-power generation capacity in the energy mix. The “emerging plan” presented in the draft IRP 2023 provides for about 6,000MW of gas power to be procured by 2030 — half of this through the state-backed IPP programme and the other 3,000MW by Eskom.
Vivekanandan, in an interview with Business Day, said the 2,000MW gas-to-power that the state hopes to procure through the first gas power bidding round is “significant”, but in line with the IRP.
“We will have to do our due diligence and review each project on its own merit, but we are comfortable to stand behind gas-to-power projects.”
But, said Vivekanandan, introducing gas or liquid fuel-fired generation capacity brings its own challenges.
“We need to make sure projects comply with all environmental regulations.
“Also, you now have to worry about the source of the gas ... and how stable is that source ... for now, SA does not have significant amounts of gas.”
SA’s only major source of natural gas is supplied by Sasol via the Rompco pipeline from gas fields in Mozambique. “The little bit that we get from the Rompco pipeline is already being used by Sasol and industrial clients,” he said.
Industrial gas users have sounded alarm bells over the decrease in gas supply from this source as demand already outstrips supply.
There are some new gas discoveries, said Vivekanandan, such as those off the southwest coast of SA, but finding new gas supply “is a critical issue”.
The DBSA already has experience in gas-to-power energy generation in East, Central and West Africa, which will allow it to support project developers in the inaugural gas-to-power procurement round, he said.
One of the factors it considers when evaluating new gas-to-power projects, is the overall energy requirement in the country and what role gas can play versus other sources of energy that may be cheaper.
“There needs to be a clear developmental need for gas-to-power in the country’s energy mix. We also look at who the off-takers will be and how credible they are. In this case, it will be the SA government, and we believe in the creditworthiness of the government.”
The DBSA last year issued a request for proposals for a review and possible replacement of government-backed IPP procurement programme.
Guarantee requirement
In a written response to Business Day, the DBSA said while there has been a reduction of the National Treasury guarantee from 100% to 80% for these IPP projects, there is “a case to be made to lower the guarantee requirement in order not to burden the national fiscus”.
The reduction in the guarantee relates only to a government default or Eskom’s failure to pay. In the case of government termination through legislation or expropriation, this guarantee remains at 100%.
“Government has never reneged on its payment obligations under any of the bid window rounds and we do hope that this continues to be the case. We will have to price for that unknown project risk but do not see an issue with the reduction in the government guarantee,” the DBSA said.
Vivekanandan said “as much as the country is still solid, the programmes do put significant contingent liability on the state’s balance sheet”. The DBSA sees the need to review whether it makes sense to run the IPP programme in its current form.
“We have funded several private-to-private renewable energy projects of the same size or even bigger than those awarded under the IPP programme. [The question for us then is] what the longer-term role of the state is as a guaranteed off-taker when the private sector can step into that role.”
But, he said, while it has been proved that renewable energy projects are viable without any state backing, the same might not be true for gas-to-power or battery storage projects.
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