Gas Oil Renewables

It’s the green train now — and you’re on the wrong platform, Gwede Mantashe

By Mark Swilling

23 May 2021

Original Daily Maverick article here

 

 South African Minister of Mineral Resources and Energy Gwede Mantashe. (Photo: Gallo Images / Netwerk24 / Felix Dlangamandla)

On the day that the International Energy Agency (IEA)[1] brought out a report on how to achieve the global consensus target of “net zero” carbon emissions by 2050 by ensuring no more fossil fuel infrastructures get built, South Africa’s Minister of Mineral Resources and Energy, Gwede Mantashe, declared in Parliament during his budget vote speech:

“We are going to be a major player in gas and oil.”

And in the same week, the G7 countries issued a communiqué after a breakthrough resolution on climate change that stated “International investments in unabated coal must stop now”.

In reality, all fossil fuels are being targeted as global leaders become more and more concerned about the economic implications of climate change. Mantashe may think he’s standing waving his SA flag at Park Station waiting for the Blue Train to arrive, but he never read the sign on the way in saying the train service has been cancelled. He cuts a terribly lonely figure on that deserted platform.

In many speeches since his election as president, Cyril Ramaphosa has made it clear that he fully understands that the global energy transition under way is a clear and present economic opportunity for South Africa. He realises that this is not just about the moral challenge to respond to climate change; it is equally (if not more so) about access to the massive build-up of low/zero cost investment funds looking to invest in what is now the cheapest source of energy available in the global economy — renewable energy.

The globally recognised group of economists on his Presidential Economic Advisory Council (PEAC) issued a report in October 2020 on South Africa’s economic recovery that made clear how the president understands the world we live in today[2]:

“What used to be a choice is now mandatory. Those countries not adapting to a green transition will find themselves behind and excluded. They will be behind on the innovation curve, the cost curve will suffer from stranded assets and will face increasing barriers to markets that have accelerated their own transitions. Thus, the question is not whether, but how.”

By becoming “a major player in gas and oil”? Surely not, Minister Mantashe. Read the sign. The Blue Train left long ago. It’s the green train now, and you’re on the wrong platform.

According to a report released in May 2021 by the Edmond de Rothschild Asset Management firm, “the last year could have seen the energy transition take a back seat, but investment increased to a record high, notwithstanding the economic disruption caused by Covid-19”.

Reflecting the views of most of the largest investors in the world, the report goes on to observe: “Globally, governments are united in their determination to facilitate a strong, green recovery from the pandemic. Where Covid-19 could have pushed the climate change agenda down the priority list, it has instead increased people’s environmental and social awareness.” The election of Joe Biden as US President reinforces this trend — one of his first actions was to re-enter the 2015 Paris Agreement and he has promised a $2-trillion green investment stimulus. China is now the largest producer of renewables, increasing the solar content in its mix by 16.6% last year. The PEAC’s reading of the trends cited above is, therefore, spot on.

According to Bloomberg New Energy Finance, investments in 2020 in the low-carbon energy transition went over the $500-billion mark for the first time. This included investments in wind and solar energy (60% of the total), energy storage, electric vehicles charging infrastructure, green hydrogen production, carbon capture and storage, as well as a range of small-scale systems (heat pumps, zero-emission vehicles, energy-efficient appliances and so on). Investments in renewables at $303-billion in 2020 are now double the total investment in new fossil fuels and nuclear energy combined.

As of March 2021, more than 1,300 financial institutions globally have announced that they will divest from coal mining and/or coal-fired power plants — representing nearly$15-trillion of Assets Under Management (AUM). Those funds need outlets, and that is pushing down the cost of capital globally for green projects — a major opportunity for first movers. Indonesia, for one, is taking the gap to fund the turnaround of PLN, the state-owned energy utility company moving into renewables.

Economists are also united in thinking that green investments are the best drivers of economic recovery. In a recent survey of 230 leading economists from 53 countries led by former World Bank Chief Economist Nick Stern, all agreed that the most effective post-“pancession” stimulus would be green infrastructure investments. German policymakers have heard this message: they have a €130-billion post-Covid-19 economic recovery package which includes €50-billion for climate change, innovation and digitisation.

It is also true that Minister Mantashe announced during this speech in Parliament that a significant amount of renewables will also be procured. This needs to be welcomed, but it does not achieve the target of 5GW of renewables per annum, which is what is needed if we want to avoid permanent load shedding by 2025 and if we want the lowest-cost energy available.

What South African and international investors want to see is clear-cut policy certainty that aligns with global trends, the PEAC report and South Africa’s Nationally Determined Contribution (NDC) document (required for submission to COP26 later in 2021). As the Chair of COP26, the UK government is clearly making it the “finance COP”, ie how to ramp up investments in renewables to accelerate the energy transition. It set up the Energy Transition Council for this purpose, but South Africa did not accept an invitation to join this exclusive club of funder-ready potential energy transition countries (although there is some unconfirmed evidence the invitation has now been belatedly accepted).

In anticipation of the upcoming “finance COP”, the World Bank recently announced the formation of the Coal Transition Fund to manage large-scale investments in the energy transition.

According to the late Prof Bob Scholes, scientists have found no support for significant shale gas potential in the Karoo, and the majors have left the room. Nor is (the dollar-denominated) gas from Mozambique a long-term option — security specialists predict that this low-intensity war will escalate over time, not dissipate.

When the minister of mineral resources and energy announces in Parliament that “We are going to be a major player in gas and oil”, investors just roll their eyes in exasperation at a time when the opposite is needed. While gas must play a role as backup for a renewables-based national electricity system in future, many researchers and investors are deeply concerned that Mantashe’s real agenda is to put in place a new national gas infrastructure to provide baseload energy. Again, this runs against global sentiment captured by the president of the European Investment Bank (EIB) who said in January 2021: “To put it mildly, gas is over”.

Saliem Fakir has attempted to join the dots, pointing to the “ ‘invisible hand’ of Gwede Mantashe slowly opening the gas tap… Mantashe is working with his colleagues to unfurl what looks like new economic diplomacy with Mozambique — both necessity and gas economics are driving this”. Needless to say, the displacement of local communities from their traditional livelihoods by the gas project in Rovuma catalysed a locally driven insurgency in northern Mozambique that has now brought the gas project to a halt.

The Gas Master Plan Consultation Document (March 2021) clearly states that “…South Africa does not currently feature on any of the published proven natural gas reserve lists…” This, the report states, could change “provided the initial gas estimates, specifically unconventional natural gas reserves, hold true”. This is, of course, a major proviso: this means as of now we have no certainty that we actually have the gas we need to realise the ambitious aims of the Gas Master Plan. According to the late Prof Bob Scholes, scientists have found no support for significant shale gas potential in the Karoo, and the majors have left the room. Nor is (the dollar-denominated) gas from Mozambique a long-term option — security specialists predict that this low-intensity war will escalate over time, not dissipate.

Nevertheless, there are many indicators to support the notion that there is an ambitious baseload gas plan afoot. The Gas Amendment Bill approved by Cabinet in February 2021 for submission to Parliament is clearly underpinned by a baseload gas strategy for South Africa. Most concerning of all, it gives the minister extraordinary executive powers to determine how this will take place and who will benefit. This is significant because how you set the rules of the game determines the outcome. This is most clearly apparent in the Risk Mitigation Independent Power Producer Procurement Programme (RMI4P) and how the rules favoured gas producers and non-lowest cost energy.

Despite the fact that every management training course that every professional attends invariably includes an input on the importance of systems thinking, the RMI4P rules (that a team of expert consultants from respected engineering and law firms drafted) requires every project to be a stand-alone “energy island”, with no interactivity with the wider energy system. This included a specification that each project must guarantee continuous supply for a daily minimum of 16 hours. Easy for a gas ship not dependent on the weather, but hard for a renewable energy plant that can only achieve that with a lot of expensive backup storage and/or fossil fuel generation. By contrast, in a widely circulated paper by energy expert Clyde Mallinson, who explicitly used a systems approach, a very different result was achieved[3].

The RMI4P process resulted in eight successful bidders, three of which were the controversial Karpowerships making up two thirds of the 10TWh of energy that will be generated per annum over 20 years. The average price is R1.58/kWh (with, interestingly enough, ACWA power, a renewable energy provider with a lot of expensive backup, coming in the cheapest at R1.46). All the projects will create 3,800 construction jobs plus 13,500 operational jobs over 20 years. The capital investment will be at least R25-billion (excluding connection infrastructure) and possibly as high as R45-billion, plus at least another R150-billion to import the gas (paid in dollars at unpredictable prices, with exchange rate risk).

In Mallinson’s model, when new renewable energy and storage facilities (with no gas as baseload) are connected into the national electricity grid in an interactive systems manner, the end result is totally different. Mallinson estimates that by adding — in a systems integrated way — 5GW of PV, 3GW of wind and 2GW/4GW of storage for an investment of R95-billion, an additional 30TWh of energy would be produced per annum over 20 years.

Because these new facilities are not stand-alone “energy islands” but systemically interconnected, the average cost is lowered from R1.58 to R0.61/kWh. The reason for this is that, unlike the “energy island” approach, a systems approach enables all the available energy to be used and the grid’s capacity becomes the systemic energy storage and efficiency regulator.

Most important of all, there is no price volatility because no gas needs to be imported and all the local content requirements remain applicable which catalyses upstream manufacturing and services jobs on scale. We have already built 5GW of renewables, creating 50,000 jobs in the process — no reason why this cannot happen again. This excludes the operational jobs created and more importantly the up- and downstream manufacturing and services jobs that will also be created.

Under its new leadership, Eskom is well aware of the challenges it and South Africa face and what needs to happen to address the challenges.

In other words, to generate three times more energy at much lower cost (and with price certainty) with the added benefit of nearly four times higher infrastructure investment (with full local content adherence) and (at least) 10 times more jobs, all that would be required is an appropriate set of rules that treated the energy system as a system comprising a multiplicity of interconnected generators and storage facilities controlled by an effective system operator (which Eskom does well, already). This is how sophisticated energy systems are run elsewhere in the world. Why not here? And to make my point: it really does matter who has the power to set the rules of the game!

The smoke signals rising up above the Karpowership gas deals are concerning. They look so similar to the start of a familiar cycle: journalists uncover problematic connections (met with denials), whistle-blowers follow soon after (and get dismissed), academics write their analyses, and then we have a commission of inquiry. Think arms deal, think SARS, think Eskom/Transnet/Denel/Prasa and Zondo Commission. And of course, few go to jail. That’s the South African way. Can we change the pattern this time round?

Despite all the concerns about the future of natural gas in the world transitioning to net zero carbon emissions, there is a future for a gas about which discussion has only just started, namely “green hydrogen”. This is taking off globally, and major plants are already being constructed in France and Germany. And the first domestic household green hydrogen storage module is now commercially available in Australia.

Hydrogen is made by splitting the H2O molecule using electrolysis to capture the hydrogen. But for this, you need electricity. If you use renewable energy, then the output is called “green hydrogen”. The massive quantities of water used by the coal-fired power stations could be used for this purpose when the power stations close, thus creating a whole new industry with significant export potential. Sasol has already indicated that it is heading in this direction.

If natural gas is used in a gas infrastructure designed to switch later on to green hydrogen, then this could ensure that we avoid creating the stranded assets envisaged in the Gas Master Plan. But the problem is that hydrogen is not even mentioned in our Gas Master Plan. And given the speed of the green hydrogen revolution, natural gas may well be in danger of becoming redundant as a so-called “transition fuel” (as suggested by the EIB president). Indeed, this may mean the Gas Master Plan is already out of date.

South Africa’s greatest need now is certainty about our energy future. A fully updated Integrated Resource Plan aligned with global trends, the PEAC and NDC would do the trick. The continued uncertainty prevents investment and impacts negatively every day on businesses and households. As Eskom drifts closer and closer to the edge of a system collapse, policy uncertainty and mixed signals at the highest levels continue and investors hold back.

Under its new leadership, Eskom is well aware of the challenges it and South Africa face and what needs to happen to address the challenges.

However, after many bold statements and initiatives since the start of 2020, at a press conference on 18 March, Mantashe told Eskom to “stay in its lane”. Without the full deployment of Eskom’s full suite of skills and resources, the government on its own will not prevent the looming disaster we face. Nor will the short term be resolved by long-term strategies to rely on fossil fuels we either don’t have, or else no one will invest in them.

What should worry us all is that the best strategic decisions only tend to get made when the crisis hits. Must we really wait for this to happen before we finally unite around an energy transition strategy that delivers the cheapest energy in the shortest possible time? Undeniably, only renewables can deliver on that. Why delay the inevitable? The green train is leaving the station. DM

[1] The IEA has for decades been a club of the largest carbon emitters in the world. 

[2] Briefing Notes on Key Policy Questions for SA’s Economic Recovery, South African Presidential Economic Advisory Council, October 2020

[3] Mallinson, C. 2021. Briefing note: A systems approach to the South African electricity supply crisis: unpacking the results of the Risk Mitigation Independent Power Producers Procurement Programme (RMI4P).

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