Implementation of the Liquefied Petroleum Gas (LPG) Regulations and the Two Pilot Projects implemented in Atteridgeville & Tweefontein: Department of Energy on progress

Energy

21 February 2011
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Department of Energy gave an update on the price regulation of liquefied petroleum gas.  It covering the issues generated at stakeholder workshops and reported on its pilot projects. At issue in the Department’s price adopted approach was the link between the Maximum Refinery Gate Price (MRGP) of liquefied petroleum gas and 93 octane fuel price movements locally, whereas the import price of liquefied petroleum gas was linked to Saudi Arabian prices. The Department was seeking to make zonal logistic costs transparent by basing them on magisterial districts. Of concern was that wholesale level prices were not regulated and so could increase and eat into the margins of retailers. Cross filling and hoarding were identified as challenges within the industry. A zero value added tax rating on liquefied petroleum gas had been suggested but had not been accepted by the Department. Stakeholders were concerned that price discussions could be deemed to be in contravention of competition laws. The Department noted that there had been a general increase in prices but said that the impact of the regulations lay in the fact that the increases would have been higher had the regulations not been in force. 90% of households in Atteridgeville (in Tshwane Metro, Gauteng) and Tweefontein South and North (in Thembisile Hani Municipality, Mpumalanga) were supplied with liquefied petroleum gas appliances to facilitate gas usage resulting in a verified 1 377 MWh shift in energy usage in the first and 2 607 MWh in the second. The projects had suffered from poor management, poor supply, poor distribution, poor marketing and poor appliance quality. The Department would engage with Transnet over import infrastructure at the country’s harbours. It would be meeting with PetroSA to take over the pilot project. The Department was working towards the deletion of a clause which excluded liquefied petroleum gas users from benefiting from demand side management rebates in the regulations. The promotion of liquefied petroleum gas was not about replacing existing power plants but to delay investment in new power plants. The demand for liquefied petroleum gas was expected to grow by 400%.

Members asked if a study had been made to see if liquefied petroleum gas was cheaper than electricity. What factors caused the gas price to increase? Members wanted clarification on the levies added to the “gate” price to make up the final price. What lessons were learnt in the Western Cape pilot project? Were there safety concerns regarding the use of liquefied petroleum gas?  Had the Department set up monitoring teams to monitor prices? How long would the pilot project continue and when would it be concluded? What would the impact of imported gas be? How could the educational awareness campaign on the safety and usage of liquefied petroleum gas be continued and how would the project impact on job creation? Members were concerned over the weaknesses that had been identified in the context of a roll out of the project. Members wanted a full report from the Department not just a presentation.

Meeting report

Briefing by Department of Energy
Mr Muzi Mkhize, Chief Director: Hydrocarbons, Department of Energy, gave an update on liquefied petroleum gas (LPG) price regulation and on the Department’s pilot projects. Giving a brief overview, he said that price regulation of the maximum retail price for residential customers had started in July of 2010, that there had been a stocktaking workshop in November 2010 and a follow up meeting in January 2011.

Issues raised at the workshop were that the Maximum Refinery Gate Price (MRGP) of LPG was linked to 93 octane movements within the basic fuel price (BFP) mechanism, whereas the import price of LPG was based on Saudi Arabian prices. This issue as well as zonal logistics costs based on magisterial districts were included as a deliverable for the Department by the end of this year. There was concern that the price was not regulated at wholesale level where it could increase and eat into retailer’s margins. Cylinder management in the form of cross filling and hoarding were identified as challenges.  A zero value added tax (VAT) rating had been suggested but had not been accepted by the Department. The Department would, however, monitor developments. Concerns raised that gas sold for domestic use could be used for commercial purposes were not valid as commercial customers benefited from quantity discounts. The Department wanted to incorporate a regular review mechanism where input costs, e.g. transport cost, could be reviewed and the price of gas adjusted accordingly. There was a general limitation in that stakeholders were concerned that price discussions could be deemed to be contrary to competition laws. The make up of the current gas price was explained as well as a history of gas prices since the regulations had been introduced (see accompanying document). There had been a general increase in prices although the impact of the regulations lay in the fact that the increases would have been higher had the regulations not been in place.

Mr Mkhize then went on to review the pilot projects. Pilot projects were instituted in Atteridgeville (in Tshwane Metro, Gauteng) and Tweefontein South and North (in Thembisile Hani Municipality, Mpumalanga) where the Department supplied 90 % of households with LPG. The Department was seeking to make LPG usage more efficient by filling cylinders closer to the end user which would also bring down logistic costs. Switching to gas would require Government support in terms of a subsidy to provide the gas appliances. One of the successes was a 1377 MWh shift demand side management in Atteridgeville and 2607 MWh in Tweefontein. Weak management capabilities and the cash flow problems of the service provider led to erratic supply and distribution was poorly managed. Poor marketing meant lower LPG consumption. The poor quality of heating appliances and the issue of the affordability of LPG were challenges.

The way forward included developing the LPG strategy, engaging with Transnet over import infrastructure, considering LPG as a viable alternative to electricity and getting a written response from PetroSA to take over the pilot projects.

Discussion
Mr J Selau (ANC) asked if a study was made to see if LPG was cheaper than electricity.

Mr K Moloto (ANC) asked what factors caused the gas price to increase and wanted clarification of the levies added to the “gate” price to make up the final price.

Mr E Lucas (IFP) asked if savings could not be made in the transport of gas and in the manufacture of cylinders rather than the importing them.

Mr S Motau (DA) asked if the Department had an idea of what electrical power savings could be garnished from a shift to gas. He said the price of cylinders acted as an impediment to its utilization. How far had PetroSA committed itself now that the pilot project had concluded?

Mr D Ross (DA) asked why it appeared that PetroSA was reluctant to take the pilot project further.

Ms B Tinto (ANC) asked what lessons were learnt in the pilot project in the Western Cape. The Department appeared to be reacting to events (introducing LPG regulations when there were problems). Were there safety concerns regarding LPG use? LPG was generally used when there was no access to electricity. She said the time taken by the price regulator was too long.

Mr Selau asked if the country could supply the market if the pilot was a success and the market responded positively to LPG.

Ms Tinto said the cylinders were not women friendly, being heavy and the gas outlets were situated far apart.

Mr S Radebe (ANC) asked if the Department had set up monitoring teams to monitor stakeholders and competition law in the wake of the Department’s announcement that LPG prices had to be low and regulated. He requested that the Committee take the initiative to oversee the pilot project through site visits, as when the Committee had checked up on the solar water heaters it had discovered that there had been nothing. He said the Department had acknowledged that marketing was a weakness but it had not come up with a solution. He asked how the educational awareness campaign on the safety and usage of LPG be continued. He wanted to know how the project would impact on job creation.

Mr Mkhize said ideally the Department would have worked on a strategy and then on the price but it had embarked on the initiative because of the outcry over the price increases in gas, so currently the strategy was still being developed.

It recognised the job creation imperative and would monitor all projects in this respect.

It would be meeting with PetroSA in March.

In comparing the cost of electricity to LPG one first had to look at the regulatory price which was based on the price of unleaded 93 octane petrol. An increase in the petrol price brought about an increase in the gas price as they were linked.

With regard to logistic costs the Department wanted a transparent zoning system to determine transport costs based on magisterial districts.

The Department was in discussions with local companies over the manufacture of gas cylinders locally. It was promoting cylinder and LPG use but South Africa did not have sufficient LPG for domestic use.

The Department wanted LPG outlets to be brought closer to the end user and the design of the cylinders to be more user friendly to accommodate the weight factor.

Mr Tseliso Maqubela , Deputy Director General, Department of Energy, said that even as the strategy was being developed the Department’s target was for LPG gas to replace the electricity output of a power station of Medupi’s size.

He said that the country would need import facility infrastructure at its ports if imports were to increase as there were only small facilities at the harbours of East London and Port Elizabeth. There was a planned terminal for Saldanha which was awaiting a decision from the energy regulator and the ports authority. Given the anticipated future price in increases in electricity, LPG would be cheaper than electricity if it was compared Joule for Joule. Countries like Indonesia and Venezuela had successfully switched to gas. In Indonesia eight years ago paraffin sales were stopped.

A facility in Blackheath, Cape Town for the manufacture of cylinders was trying to make the cylinders more user friendly.

In Khayalitsha and Gugulethu and Langa the cylinders were being sold from spaza shops where they were being stored in safe and secure containers which pointed to the growing use of LPG in the townships.

The regulatory issue to be dealt with in multi year pricing agreements was that the Department needed to ensure that a clause which excludes LPG use from benefiting from demand side management rebates be deleted from the regulations.

ArcelorMittal and the Department of Trade and Industry (DTI) had indicated a readiness to talk of assisting with steel supply to be used in the manufacture of gas cylinders. The Blackheath plant mentioned earlier was funded by the Industrial Development Corporation (IDC).

PetroSA’s responses to the pilot project at this stage had been of an informal nature and the Department needed to engage with it at the appropriate and more formal level.

There were challenges to maintaining competition but he believed that the strategy the Department was developing would deal with that.

The big players and producers in the fuel oil industry were getting out of the downstream businesses and there were new entrants but the big players still had to unbundle their interests.

The Department was looking at the introduction of gas shops, and taking gas supply out of the petrol service stations.

It welcomed oversight visits.

The Department was meeting regularly to help on safety issues in an awareness campaign and to help sensitise the public to the benefits of LPG.

The Western Cape pilot was very successful intervention. Government intervention was needed to subsidise switching costs through the purchase of appliances and cylinders.

The Chairperson asked who the stakeholders were. What was meant by cross filling and cylinder hoarding? For how long would the pilot project continue? When would it be concluded? What were the names of the two bottle filling companies in Atteridgeville and Tweefontein? He was concerned that the weaknesses that had been identified in the pilot project needed to be overcome before there was a rollout of the project.

Mr Selau noted that most of the supply would come from imports yet the Government’s mission was to create jobs. Was local production of gas a possibility? He asked if the Department had an energy mix scenario.

Mr Motau asked what the impact of imported gas would be.

Mr  Moloto who was concerned about import parity pricing asked if there was potential to capture gas from local content and questioned whether gas could be zero rated as when paraffin had been zero rated the benefits had not been passed on to consumers.

Mr Mkhize said there was a wide range of stakeholders, the oil companies, the National Energy Regulator of South Africa (NERSA), Transnet, the National Ports Authority, the Department of Trade and Industry and the Industrial Development Corporation together with associations like the Liquid Petroleum Gas Safety Association, municipalities, and South African oil refineries (all South African LPG came from refineries except that which was imported).

The cross filling of cylinders was a big issue from a safety perspective. Who was responsible if a cylinder branded with Company X’s logo was filled by Company Y. Company X would be charged although Company Y did the actual filling and should be held accountable.

Hoarding occurred when a customer took in a cylinder, branded with Company X’s branding, for filling by Company Y. Company Y gave the customer a filled cylinder with its own (Company Y) branding while hoarding Company X’s cylinder.

LPG was by-product of the oil refinement process. Other options were gas trade agreements with Mozambique.

The local LPG usage situation would be monitored to determine if the VAT rating needed to change.

Mr Maqubela said it was not about replacing existing power plants but the delay in investing in new power plants. Even if the Government invested in new refineries it would not be enough to meet the demand for LPG which was expected to grow by 400%. Most jobs would be created in cylinder manufacture. Imports would impact on prices although it could be mitigated by importing in bulk. The demand for LPG was driving investments in this area. The Department had started the process for an integrated energy plan which integrated the industrial redevelopment plan, the liquid fuels and gas plans and took into consideration transport and water. 

Mr P Dexter (COPE) asked if the State had thought about a strategic intervention on LPG if it was such a clean source of energy.

Mr Maqubela said that the Department was thinking big but was not as vocal perhaps as it should be.

The Chairperson asked if LPG was a viable alternative to electricity. He wanted a full report from the Department not just the PowerPoint presentation. What were the projections on LPG’s full potential? The report had to address the safety concerns and the issues of accessibility to the public and affordability.

The consideration and adoption of minutes was deferred until the next meeting.

The meeting was adjourned.


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