Gas – a powerful element of the energy transition

By Keith Webb

As renewable energy sources become cheaper, and we transition from coal to cleaner forms of energy, gas plays a critical role in our energy transition. As a flexible energy source, that is quick to roll out, gas has the power to balance variable power generation from renewable solar and wind power.

In order to understand our current period of transition, we need to understand where we’ve come from. Coal-fired power was historically preferred as it was readily available, easy to mine, as well as easy to handle and transport. These factors made it a cheap source of primary power. However, the convenience came at a cost to society in terms of carbon emissions, which are now recognised through the introduction of ‘carbon taxes.’ In South Africa older power stations will be decommissioned over the next 20 years as coal resources continue to deplete around the existing plants and these plants reach end of life. For sustainability and cost reasons, leaders across the globe understand the importance of renewable energy.

Renewable power sources offers us exciting prospects. Solar power, for example, has become cheaper to produce than other forms of power. Renewable power facilities have very limited operating costs, and these can be streamlined further with smart financial structuring. The key to making renewable power cheaper is to amortise the upfront capital cost across the full life of the asset through longer term funding, usually longer than 15 years. The cost of that funding depends on having well-structured procurement programmes offering bankable power purchase agreements with credit-worthy offtakers.

At this stage, the mix of renewable energy and flexible generation technology such as gas becomes a critical aid in the provision of grid power. Gas power generator technologies are very flexible and can typically be started up quickly. This makes them ideal to balance variable power generation from renewable solar and wind power. Gas – in particular LNG – results in a cleaner burn, one that is far cleaner that diesel, the peaking power fuel source of choice for South Africans. Less carbon is emitted per watt of electricity produced. In a ‘closed-cycle’ format, gas turbines can be even more efficient as a baseload power supply to replace coal-fired power.

Gas has become easier to procure in recent years, thanks to substantial discoveries of gas in Mozambique, and the advanced technology to transport this around the globe through liquefaction. However, the gas supply chain – from upstream gas production, liquefaction, shipping, importation, and trucking or piping and regasification – has to continue to improve its ease and attractiveness in order to compete against coal. This can be achieved through the distribution of gas’s substantial upfront capital investment across greater volumes. Simply put, more power stations need to use gas in conjunction with renewables, and more people need to use gas directly in their homes, or industrial processes.

At Rand Merchant Bank (RMB), we are directly involved in structuring and facilitating energy transactions. In the renewable space, we were Mandated Lead Arranger on the 147 MW Roggeveld wind farm and the 100MW Kathu Concentrated Solar project. We were similarly Mandate Lead Arranger on the 200MW Amandi, 450MW Azura and 350MW Cenpower gas-fired power stations in West Africa. Finally, we have structured and arranged preference share funding for Thebe Renewable Energy’s R665m renewable energy facility acquisition and a R310m preference share facility to iThokazi, who owns a diversified portfolio of eight projects (2 wind farms and 6 solar PV plants totalling 300MW).

In summary, gas is a readily available source of power that will play a critical role as we explore methods to decrease our carbon footprint. Alternatives such as batteries and other storage techniques such as hydro-pump storage are currently expensive, and while technology in the space is advancing in reduced battery costs, this is still too early in its development to make an impact. At this point of time, the mix of renewable and gas-fired power is a viable, cost-effective overall solution for grid power.

Webb is Senior Transactor for Infrastructure Finance at RMB.