Requirements for a sustainable growth of the natural gas industry in South Africa

Abstract

South Africa’s energy economy is dominated by coal, which produces relatively high emissions of greenhouse and noxious gases during combustion. This causes environmental problems that may lead to health risks that are cause for concern. In this thesis, various propositions are tested about whether in the Cape Metropolitan Area natural gas is a lower cost energy source than coal for generating base load power within a specified range of capacity factors under different scenarios. The problem being investigated is the uncertainty about the quantified effect that revenue from monetised carbon dioxide credits and inclusion of damage costs would have on the breakeven selling price of electricity, if natural gas were substituted for coal for generating base load power in the above Area. The research procedure entailed conceptualising and developing technical details of four power generation scenarios and reviewing various tools for cost-benefit analysis. Next, a Te- Con Techno-Economic Simulator model and screening curves were selected from a suite of potential tools. The power generation cost profiles for coal and natural gas were determined, followed by sensitivity analysis. The model was populated and used to compare the lifecycle economic performance of coal and natural gas technologies. Natural gas emerged as a lower cost energy source than coal for generating base load power within a specified range of capacity factors under all the scenarios. This thesis recommends the following: the introduction of tax holidays and favourable capital equipment depreciation regimes to stimulate natural gas exploration; the use of natural gas as an energy source to promote small-scale enterprises in communities contiguous to gas transmission pipelines; in addition, electricity prices should reflect damage costs in order to internalise externalities associated with power generation. The contribution to knowledge is the innovative way of financing the gas-fired power generation project by using the monetised carbon dioxide credits under the novel Clean Development Mechanism to redeem a bank and a shareholders’ loan. This could result in reducing the loan payment by 4.3 years, saving 38 % in interest payments and allow scarce finance available for project funding to be extended to other projects to the advantage of national economic development.