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Picture: 123RF/TEBNAD
Picture: 123RF/TEBNAD

The SA government’s plan to develop a gas-fired power industry brings both economic and climate change mitigation risks. Furthermore, investors in gas projects may need to absorb substantial economic losses, as the risk that fossil fuel assets will fail to make a return on investment is escalating rapidly. 

The latest Intergovernmental Panel on Climate Change (IPCC) report, released last month, warns that the world cannot afford to invest in new coal, oil or gas power projects if we are to avoid breaching the 1.5°C global warming tipping point. This echoes the message from the International Energy Agency’s Net Zero by 2050 report, published last year.

Unfortunately, the ever-increasing calls from climate scientists to halt the expansion of fossil fuels tend to fall on deaf ears. History shows that when money can be made, projects will generally go ahead regardless of their environmental and climate impacts. In SA, the Integrated Resource Plan (2019) for electricity infrastructure development still includes new coal plants. This is hard to fathom given that the country is committed to a just transition away from coal.

What’s more, the government is now considering introducing gas into the energy mix, despite the growing economic and climate risks associated with these investments. The recently released Gas Pressure report by the International Institute for Sustainable Development (IISD) identified more than 14 gigawatts (14,000 megawatts) of proposed new gas fired-power plants — assets that are likely to become stranded as the fuel is squeezed out of the market by cheaper, low-carbon alternatives. These 14GW equate to roughly 2.8 times the country’s operational utility-scale renewable energy capacity.

The risk of gas assets becoming stranded may finally stem the enthusiasm for such projects in SA as it speaks to investors in a language they understand the prospect of not making a return on investment.   

When assets become stranded they lose economic value or viability well before the end of their anticipated useful life. This can happen for a number of reasons; such as declining availability or changes in the price of fuel, lower costs of alternative energy, increasing social pressure, or tightening environmental and climate regulations. As a result investors are unable to recover their money and governments can face pressure to support the sector which may lead to bailouts and, ultimately, higher taxes and energy bills.

Climate Tracker estimates that in the US, none of the planned 28.1GW of new gas capacity in unregulated grid areas will recover the original investment. Project finance modelling offers a clear recommendation for Europe and the US: “Building new gas plants is ill-advised and will produce projects that are unlikely to yield returns on investment in most regions.”

Asset stranding is not merely a future risk, it is already under way. In India, 14.3GW of gas-fired power stations — 60% total gas-fired capacity — was declared stranded by the ministry of power in 2015. Furthermore, 5.3GW of capacity was built but deemed stranded before it had even begun operations, and nine gas plants totalling 5.7GW were stranded within five years of being commissioned. In 2019 the State Bank of India indicated that it would need to write off these investments.

The decision to invest in gas-fired capacity in India was largely based on the assumption that a cheap source of gas would become available, but this never materialised. SA is in a similar position. For one, the offshore gas fields that supply national oil firm PetroSA’s operations in Mossel Bay are essentially depleted, while the supply from Pande-Temane field in Mozambique is set to decline from 2025. 

Earlier this month Sasol announced it was withdrawing from a proposed pipeline further north in Mozambique because the asset risks becoming stranded. With uncertainty around long-term domestic gas supply from new off- and onshore discoveries, the remaining option is to import liquefied natural gas (LNG). However, this leaves SA vulnerable to exchange rate fluctuations and price volatility clearly demonstrated by global gas price spikes since Russia’s invasion of Ukraine.

Stranded assets are just one of a growing list of economic risks associated with gas-fired projects. For instance, SA could become much less competitive in the global trade arena as the EU and other markets enforce carbon border taxes. 

At the same time, alternative sources of energy that provide the same functions as gas are improving rapidly in both capability and cost. Energy storage and green hydrogen are just two examples of such alternatives expanding in SA.

Gas power plants should be avoided where lower carbon alternatives are available. Gas is a fossil fuel and a significant source of global warming; methane leaks are a risk across the entire supply besides carbon dioxide released from combustion. And from a business perspective, the prospects for gas power projects are increasingly uncertain, particularly as lower-risk and more sustainable alternatives gain traction.

The government should therefore significantly ramp up its renewable energy and storage investments instead, to build a reliable and low-carbon energy system that will provide affordable electricity to all South Africans.

• Halsey is a policy adviser at the Canada-based International Institute for Sustainable Development.


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