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Aug 15, 2012

Development plan calls for more gas, warns on coal export restrictions

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South Africa’s National Development Plan 2030 calls for efforts to be made to substitute coal with gas in the country’s energy mix, including developing shale gas resources “provided the overall economic and environmental costs and benefits outweigh those associated with South Africa’s dependence on coal, or with the alternative of nuclear power”.

The plan also calls for the proposed growth in coal exports to be “balanced” with the need for domestic coal-supply security. But it warned against a ban on the export of low-grade coal, saying that it could disincentivise investments into multiproduct coal mines.

The 484-page document, which sets the elimination of poverty and the reduction of inequality by 2030 as its overarching goal, was delivered to President Jacob Zuma in Cape Town by Minister in The Presidency Responsible for the National Planning Commission Trevor Manuel.

It was drafted by 26 commissioners, who were drawn mostly from outside government and provides a broad strategic framework to guide future policy choices and actions.

Energy formed a major component of a chapter on ‘Economic Infrastructure’, which itself was one of the 15 chapters in the plan.

Economic growth and development, the plan noted, would require adequate investment in electricity and fuels infrastructure, which provided “reliable and efficient energy services at competitive rates”.

South Africa’s overreliance on coal for more than 90% of its electricity generation and one-third of its liquid fuels was flagged as a concern environmentally, and with regards to ensuring security of supply.

South Africa, therefore, needed to devise policies and plans that secured domestic coal supply; encouraged the exploration for gas as an alternative to coal; promoted a greater mix of energy sources, as well as a greater diversity of independent power producers (IPPs) in the energy industry; improved the municipal electricity-distribution service; accommodated the needs of the poor; and gave consideration to both the timing and/or desirability of nuclear power and a new liquid fuel refinery.

GOING FOR GAS, BUT COOL ON NUCLEAR

Offshore natural gas resources should be explored and developed and investment should begin in the development of liquefied natural gas infrastructure. In addition, regionally available natural gas could also be piped to South Africa, or used in regional power plants with electricity transmission lines to South Africa. South Africa should continue to progress coal-bed methane gas opportunities and develop underground coal gasification technology.

More controversially, the plan argues that South Africa should seek to confirm the existence of what are estimated to be large-scale shale gas resources. “Even if economically recoverable resources are much lower than currently estimated, shale gas as a transitional fuel has the potential to contribute a very large proportion of South Africa's electricity needs, the report noted.

“For example, exploitation of a 24-trillion-cubic-feet resource will power about 20 GW of combined cycle gas turbines, generating about 130 000 GWh of electricity per year over a 20-year period. This is more than half of current electricity production.”

Renewable energy and imports were also highlighted as key to the diversification of South Africa electricity mix, but the plan is cool on the introduction of nuclear noting that a potential nuclear fleet would involve a level of investment unprecedented in South Africa. “An in-depth investigation into the financial viability of nuclear energy is thus vital.”

COAL POLICY URGENT

But the document also reaffirmed that, coal would continue to be the dominant fuel in South Africa for the next 20 years and that a national coal policy was, thus, urgently needed to ensure a sustainable supply of domestic coal for power, synthetic fuels and industrial chemicals, while still expanding the growing coal export market.

“The coal industry's development has been constrained in recent years due to regulatory uncertainty in the mining sector, too little investment in new infrastructure and a failure to maintain existing infrastructure.”

It argued that the new policy should focus on changing the coal-mining landscape, foster greater collaboration, ensure security of domestic coal supply and promote exports and technologies that may provide for cleaner coal use.

The plan anticipated a migration of coal mining to the Waterberg, in Limpopo, from Mpumalanga and acknowledged the need for a new heavy-haul rail corridor to those coalfields in Limpopo. “Transport infrastructure for the central coal basin and the coal line to Richard's Bay also needs strengthening to match port export capacity of at least 91-million tons per year by 2020. Other possibilities include a link with Botswana coal deposits and a trans-Kalahari rail connection, linked to expanded port capacity at Walvis Bay in Namibia and/or a further rail loop around to Maputo.”

PRIVATE PARTICIPATION

Private-sector participation would be essential to relieve the rail infrastructure investment burden, encourage IPPs and incentivise the industry to optimise domestic coal use while maximising coal exports.

Government should also be cautious in applying policy measures which might have unintended consequences. “For example, banning exports of coal lower than, say 5 500 kcal/kg, could disincentivise investments in new multiproduct mines necessary for supplying future Eskom demand, but which also depend on export earnings for their financial viability. Most of the higher-grade coals in the central basin have been mined out and new mines have to deal with lower-quality resources,” the document noted.


It also called for an improvement in the quality of market competition and regulation in the energy sector, which it described as being “far from optimal”. The economy required increased competition in electricity generation; better regulation of price, supply and quality of electricity and petroleum products; an end to crippling transport constraints. There was also a need to raise electricity prices to cost-reflective levels.

“South Africa needs a clear policy that makes explicit the electricity market structure and how it will evolve over time. New build opportunities need to be clearly divided between Eskom and IPPs. It is also important to employ effective procurement processes that initiate timely, internationally competitive bidding for new capacity and negotiate robust contracts.”

Government and Eskom needed to quicken plans to establish an independent system and market operator, which would be tasked with procuring and contracting IPPs and, “preferably, managing transmission assets”.

“Remaining regulatory uncertainties that need to be resolved include the question of IPPs selling to customers other than Eskom, access to Eskom’s grid and rights to trade electricity,” the plan said.

DISTRIBUTION DILEMMA

Also highlighted was the fact that reliable electricity supply depended on a sufficient and reliable distribution grid. But little progress had been made to ensure that municipalities, which distribute about half of South Africa's electricity, were equipped to deal with a backlog which was currently estimated to be R35-billion.

The plan, therefore, proposed a material investment in human and physical capital in the 12 largest municipal distributors, which accounted for 80% of the electricity distributed by local government.

“This is a high-priority programme that needs to be driven at national level in collaboration with these municipalities. In addition, Eskom, or larger cities or towns, could take over electricity distribution functions on a voluntary basis from smaller, poorly performing municipalities. Medium-sized municipalities, performing reasonably, could continue with delivery.”
 

Edited by: Creamer Media Reporter
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