Are Bullish Forecasts for African Gas-to-Power Overheated?

Are Bullish Forecasts for African Gas-to-Power Overheated?

16th May 2017

There is a great deal of excitement in the industry at the moment about the prospects for gas to power development in Africa, driven in part by LNG oversupply and resultant lower prices, plus the LNG-to-power initiative in South Africa.  But what lies behind the excitement, what are the hurdles that need to be overcome and where is an increase in gas-to-power likely to happen?

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Figure 1 places the current power generating capacity for the largest African economies alongside the estimated remaining resources for the Continent’s largest gas producing countries.  It also places the intensity of energy use (represented by the amount of night-time light emission) in Africa in stark contrast to that of Europe.  In contemplating this figure, what is clear is:

     - The overall energy intensity of African countries is very low compared to Europe (on average around 1/10th);
     - There is a mismatch between gas availability locally and the scale of overall electricity generating capacity, except for in the case of Egypt and Algeria; and
     - Much of the current energy usage is concentrated in the coastal areas, the major exceptions being the Nile Valley and the industrialised areas of South Africa.

Figure 1: Current Energy Intensity, Generation Capacity and Remaining Gas Resources in Africa

Source: GCA/ Craig Mayhew and Robert Simmon, NASA GSFCA

At present there are numerous power stations at or close to the coast that are fuelled by diesel or fuel oil.  These are obvious immediate targets for conversion to gas fuelling: the conversion costs in most cases are low, and the current differential between diesel and LNG prices makes a case for doing so if LNG can be sourced and transported to site conveniently.

However, there are other factors at work: there are several companies that are providing renewable power solutions on a leased basis in rural areas.  The reasons for this become clear from Figure 2, which places the potential availability of solar and hydro-electric power into context.  The inset map shows the areas of highest population in some detail.

From this figure it becomes clear that the availability of solar and hydro power are complementary: desert areas do not, after all, coincide with tropical forest.  Current large-scale hydro-power plant is concentrated along major rivers, but there are numerous smaller units on minor rivers within the shaded area, indicating high potential for small-scale hydro power.

Figure 2: Potential Availability of Renewables

Source: GCA/EU

Turning to the map of population density for a moment, it can be seen that the largest population densities correspond with the highest energy intensity in the North African coastal areas and in South Africa.  The biggest mismatches in these factors lie in Nigeria, coastal West Africa and in East Central Africa around Lake Victoria.  While Ethiopia has high population and low energy intensity, that situation is about to be transformed with the planned commissioning of some 8GW of hydro-power plant in the next few years, although it is true that the Ethiopian plans are causing disquiet among countries downstream of the planned hydro-power facilities.

Of course, interesting though they are, these maps do not capture the deficit in gas supply or other factors that will influence the development of gas-fired power generation across Africa.  Black-outs and brown-outs are legendary in much of Nigeria and West Africa, and South Africa has had a recent spate of the same when key power-plants were taken off-line for repair.  But in much of Africa electricity demand is somewhat more elastic, as demonstrated by the pico-scale solar/storage solutions that are being implemented by independent suppliers (Figure 3).

Figure 3: Example of pico-scale solar energy implemented across Africa

Other factors at play are environmental concerns and the affordability of gas-fired stations.  In much of Africa the low population density, energy intensity and availability of renewable sources mean that thermal power generation will be challenged.  Environmental concerns also underlie South Africa’s initiative to establish LNG-to-power in key coastal areas, to allow retirement of aging coal-fired plant.  However, affordability comes in two forms: the retail cost of power, and the impact on an economy of fuel imports.

While LNG prices are at a current low, they may not remain so for long as fuel substitution takes hold.  Coupling this to the fact that improved environmental performance is only really available from combined-cycle gas-turbine generators, where efficiencies of 60% are being claimed by all three major gas turbine suppliers, this means that incremental power cost for new plant is likely to be in the US$ 80/MWh to US$ 120/MWh range when fed by imported LNG for base-load stations.  In this context it is worth noting the $24.2/MWh bid received by Abu Dhabi for a 350MW solar station in September 2016.

The impact on an economy of switching from internal fuel use to an imported source will also be felt in the current account balance of payments.  In the case of South Africa, the current LNG-to-Power plans imply an increase in import payments of around 10% in ZAR terms - a significant swing in the balance of trade even at the current low LNG price.

In GCA’s view, it seems likely that gas-fired power will develop in Africa where there is indigenous gas supply at competitive cost, with on- and off-grid solar/wind/hydro solutions possible elsewhere.  Figure 1 suggests that any growth in gas-fired power generation would likely be concentrated in West Africa, Algeria, Libya and Egypt.  East Africa presents an interesting picture: the area’s gas resources lie around half-way between the populous Lake Victoria region and the industrialised, and power-hungry, South African regions.  There is already a 1,400 km high-capacity, high-voltage direct current grid interconnector from the Cahora Bassa dam to South Africa.  The dam lies around 1,000km from the Rovuma Basin resources of Mozambique and not much further to the Tanzanian gas resources. 

So the question is: could we see Tanzania and Mozambique emerging as a centre for power generation and export to South Africa and the Lake Victoria regions, on the back of the vast offshore gas resources being discovered there?


Are Bullish Forecasts for African Gas-to-Power Overheated?

Charles Goedhals

Development Planning Advisor -

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