In October, Gas Strategies co-hosted the Gas to Power in Africa Forum in tandem with King & Spalding and Standard Bank. The day saw over eighty invited attendees from more than forty different companies contributing to the panel discussions. The level of interest from such a wide variety of attendees signals the breadth of interest in the development and funding of gas-to-power opportunities in Africa.
The schedule featured an overview of the inherent challenges of gas and LNG-to-Power projects in Africa, before the first session’s focus on LNG-to-power.
Chris Levell from Gas Strategies presented a commercial perspective on LNG-to-Power identifying three areas for success: the integration of the LNG and power chains, clarifying the identity and role of the project developer and overcoming the project investment dilemma.
Chris set out how the historically conflicting nature of inflexible LNG supply and flexible power demand creates a challenge for LNG-to-Power projects – which a successful project will need overcome. Both gas supply and power generation need to have sufficient demand certainty to attract investment and also ensure there can be sufficient flexibility to cover the inherent uncertainty of power demand. This was particularly the case where gas-fired generation is being sought to flexibly balance intermittent renewables.
Project success requires clarity in objective and potentially a trade-off between the host government’s objectives and LNG supplier’s offerings. Portfolio players can provide LNG supply flexibility and longer term price certainty however this premium service comes with a premium price; whilst trading houses can offer supply flexibility but, by their nature, do not bring the same certainty regarding price and supply security.
The project development approach (state procurement vs private sector led) defines who takes the role of project developer. A state led project places greater emphasis upon the state to define the project that best meets the national objectives and the approach to procure such a project. In many respects this is taking on the role of project developer; a role which is more commonly undertaken by the private sector.
Whoever takes the role of project developer, a key role is ensuring the whole LNG-to-Power chain is financeable. Power plant investment will likely be underpinned by a 20-year Power Purchase Agreement, whereas entry into a 20-year fuel supply agreement may not be in the interest of the project, for example due to uncertainty of the plant running regime in the longer term and the future possibility of lower price indigenous / regional gas supplies that could displace higher priced LNG. The dilemma being faced by project investors and financiers is how to become comfortable investing in a power plant that does not have certainty of fuel supply over the full term of the financing.
Chris also highlighted some of the misconceptions around LNG-to-Power and what it does not do. For example, LNG-to-Power does not solve an immediate power crisis given the time lag in project development and infrastructure procurement, and it does not guarantee cheap power with a certain price – given inherent volatility in the commodity and FX fluctuations.
In the subsequent presentations there was continued optimism about the development of gas/LNG-to-Power projects in Africa. However, they would be constrained by government policy and regulation. Specifically, governments’ ability to define and articulate a gas market vision, which will lead directly into project structuring choices. Understanding decisions around the gas market design, third party access requirements and the role of the state in the project are critical to creating a successful project that can be realised at the first attempt. There was also an acknowledgement of the somewhat unpopular view that consumers may be required to bear the commodity risk of gas imports, and power tariffs will need to be updated by regulators to reflect this. This is a further challenge for African governments for whom an increase in power price is not a vote winner.
Common themes of the day can be summarised as:
- Project Structure Definition - Need for greater and earlier understanding of the LNG-to-Power chain, its players and the key drivers and risks to project structuring. Foresight and commitment by the host country is a key enabler.
- Project Specificity - No standardised gas/LNG-to-power project, all have unique objectives and are developed to meet different motivations, which require bespoke project structuring. Therefore, it is important to engage all stakeholders early to be right first time.
- Gas role in energy mix - Increasing focus on gas and LNG in the energy mix subsequent to COP21 agreement. Complemented by the adoption of FSRUs for LNG import and technological advances in gas turbines.
- LNG Oversupply – The LNG oversupply to 2020’s is a potential huge opportunity for Africa – LNG suppliers are looking to develop new markets for their LNG, and as a result are willing to contract on more flexible terms than historically.
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