By Lido Fontana

The South African Department of Energy released a preliminary information memorandum in early October that explains how the department plans to procure LNG-to-power projects.

Pre-qualification appears to be a fairly straightforward pass-fail process.

An initial request for proposals will be released with the proposed project agreements for comment. This is expected in April 2017. The final request for proposals will follow after the government takes into account any comments. 

The focus is expected to be on two sites: Coega Industrial Development Zone, which is adjacent to the deepwater port of Ngqura in the Eastern Cape Province, and the Port of Richards Bay in KwaZulu-Natal Province. Both sites have been identified by the government as having sufficient existing infrastructure, such as port, transmission lines and gas pipelines, to support the first phase of the procurement program. However, site development risk will be assumed by the bidders, who are not precluded from proposing their own sites.

The expectation is that 1,000 megawatts will be allocated to Coega and 2,000 megawatts to Richards Bay, with separate procurement processes for projects at each site.

Bidders will be responsible for verifying the suitability of the transmission line route and site selection, as well as obtaining the necessary land rights for the transmission line.

At this time, it is envisaged that the plants will operate effectively as mid-merit. The request for proposals will set a minimum annual dispatch level expressed as an annual average plant capacity factor and a maximum monthly dispatch factor, and these will be reflected in the power purchase agreements.

Fully Integrated

Bidders will be required to develop, finance, construct and operate gas-fired power plants at designated ports, with an associated gas supply chain from a floating supply regasification unit, or FSRU, or equivalent LNG regasification and storage technology.

This will entail a large amount of equipment in addition to the power plant. Bidders will be responsible for building port infrastructure, including fixed maritime structures, and for dredging of the berthing pocket for the FSRU. The marine structures must have a design working life of at least 40 years. They must also deliver gas pipelines to connect the FSRU with the new power plant, a gas distribution hub for a third party to distribute gas by pipeline, and a distribution hub for handling LNG that may then be distributed, by a third party, by either road or rail.

The power plant must be able to accept gas from local suppliers.

There must be alternative fuel storage facilities, including the option for alternative back-up fuel supplies, to mitigate the impact of unplanned interruptions to the LNG supply chain.

Bidders must ensure that the projects are “future proofed” to allow for indigenous gas and third-party gas offtake. There will therefore be a requirement to use larger sized industry-standard FSRU and to oversize capacity of the LNG receiving, storage and re-gasification elements beyond capacity requirements of the new power generation facility. The facility must also have a capacity of approximately 175,000 square meters and corresponding throughput capacity for the regasification facility and pipeline. Throughput capacity is the number of flow units per unit of time. The government wants third-party access to the extra capacity of the gas infrastructure.

Bidders should highlight their experience in use of combined-cycle gas turbines, open-cycle gas turbines, and gas-engine technologies to balance renewables.

In order to pre-qualify, a bidder must name the equity participant on whom it will rely to fulfil each of the capability qualification criteria in the request for qualifications. Bidders will need to show experience as a power plant developer, LNG supplier and terminal operator.

Each bidder will be required to propose mitigation actions to prevent the risk of any single cargo arriving late or arriving without the required LNG quantity and quality, including being responsible for putting in place back-up fuel arrangements .

Bidders will have to be ready to name its equipment suppliers and EPC contractor.

PPA

The government will award a power purchase agreement for each project with a term of 20 years from the scheduled commercial operation date.

The national utility, Eskom, will be the anchor offtaker. An implementation agreement guaranteeing Eskom’s payment obligations will be provided by the Department of Energy.

The proposed tariff structure will be Rand (ZAR) based and compensate for fixed costs (including capital, development, financing, insurance costs and fixed elements of operations and maintenance) via a capacity payment. The capacity payment will be payable regardless of dispatch as long as the successful bidder delivers on its obligations. There will also be reimbursement for variable costs (including fuel, variable operations and maintenance, consumables and chemicals) via an energy charge.

The Department of Energy, in consultation with the national energy regulator, NERSA, will provide a mechanism for gas regulation that reduces electricity price volatility in the short–to-medium term and further reduces foreign currency exposure while ensuring bankability of the project.

The price competition among bidders will include the pricing of the fuel costs.

It is currently anticipated that evaluation of the electricity pricing will be done by selecting a widely-recognized and neutral indexation forecasting service for the forecast of the different potential LNG pricing indexations, thus allowing the government to compare the various LNG price structures on a like-for-like basis.

Timetable

The request for qualifications is expected to require local participation equity requirements. Bidders will have to set aside equity interests for state-owned corporations and broad-based black entities meeting certain criteria.

South African equity participation will be at least 35%. There may be a requirement to grow this shareholding over time.

The government is in the process of compiling a list of socio-economic objectives for bids, as it did with its renewable energy program.

A key equity participant may only work with one bidder for each project. The equity participant will also be required to sustain its role and level of equity participation in the successful bidder for a set period of time after the PPA for a project is signed.

Meanwhile, a bidder may participate and pre-qualify under one or both requests for qualifications and bid for both projects. There is nothing to prevent a single company from winning both projects. 

The formal procurement process will play out in two stages: a request for qualifications, which will assess on a pass-fail basis the ability to carry out project, and a request for proposals, initially in draft put out for comment and then a final revised RFP. 

The RFP will include the proposed suite of project agreements. The Department of Energy will be looking for comments on them from potential bidders. The comment stage may take some time, after which a second and final version of the RFP will be issued and used to solicit final bids.

The project documents will not be subject to negotiation after the final RFP is issued.

The expected timetable is follows. The RFQ is expected in November. Potential bidders are expected to have to submit their qualifications by February 2017. The government is expected to release the list of pre-qualified bidders in April 2017. The Department of Energy will then engage with these potential bidders over the terms of the RFP for a month, and then the final RFP will be released around August 2017. Bids will be due sometime after that.