Gas Pricing: Department of Minerals & Energy, National Energy Regulator & LP Gas Safety Association briefings

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Mineral Resources and Energy

12 March 2008
Chairperson: Mr Nqaba Ngcobo (ANC)
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Meeting Summary

Members met with representatives from the Department, the Energy Regulator NERSA and Liquefied Petroleum Gas Safety Association of SA in order to discuss liquefied petroleum gas (LPG) pricing. NERSA outlined the objectives of LPG price regulation, and how it could assist in legislating, implementing, pricing and regulating a switch from electricity to natural gas. LPGSASA on the other hand outlined the benefits, pricing, usage and storage of LPG, and noted that some 70 000 homes received LPG cookers and low-cost fuel.

Members asked for clarity on the average price of gas and how it affected the market. The Department was also asked to comment whether the statistics provided were accurate. Members also stressed that there needed to be a basis for convincing people that gas was a more efficient form of generating energy. Some members were worried about the safety of gas and asked the Department to comment on whether it was dangerous to use and store it in low income households. Members asked about the progress regarding the gas pipeline from Mozambique. They also felt that the NERSA presentation should have outlined the cost of LPG gas, and what the other alternatives were. The Committee noted that there had been conflicting reports on the cost of gas per kilogram in the presentations.

Meeting report

Gas Pricing: Department of Minerals and Energy (DME) Briefing
Mr Nhlahla Gumede, Deputy Director General, Hydrocarbons and Energy, DME, and Mr Muzi Mkhize, Chief Director, Hydrocarbons, DME, noted that gas production largely took place in refineries in South Africa. However some of the gas was imported from Mozambique via gas pipelines. South Africa was regarded as the largest energy consumer of energy in Africa, and it consumed 4% of the total gas production in Africa. Throughout the rest of Africa most gas was primarily used for cooking and heating of water. However in South Africa, most of the Liquefied Petroleum Gas (LPG) was used for industrial applications. In terms of household consumption, the high income sectors used LPG for leisure purposes, and only a fraction of the low income sectors were using gas for cooking.  If South Africa were to import, it could do so from Algeria, Nigeria, Angola, and Egypt. In terms of pricing it was possible for LPG to be delivered at R9.00 per kilogram. The Department was proposing a pricing mechanism that was similar to petrol. The pricing was intended to promote the importation of gas. The Department had drafted a regulation that would soon be available for public comment. The legislation would also allow for the primary transportation which would enable consumers have easy access to LPG in their homes.

Mr T Mahlaba (ANC) said that it would have been good to have a comparison between the current gas pricing structure and the proposed pricing structure. The Department should also comment on whether there would be any job losses if there was a shift from electricity to gas. Besides the expensive nature of gas appliances, there was also the effectiveness and efficiency of gas to be considered. Therefore there was a necessity to look into the efficiency of many housing appliances, and determine whether gas would be as effective as electricity.

Ms S Mathibela (ANC) noted that it was unfortunate that prices jumped just as the poor switched from electrical to gas appliances. However, she noted that it would however be unlikely that poor would use gas, as it was expensive. The Department had a pilot project but Members had not been invited. 

Mr D Kekana (ANC) focused on the issue of power generation, and noted that the presentation should have focused on the alternative means for power generation. The Department was asked to comment on whether gas should be used in the manufacturing sector, as it consumed a lot of energy.
Mr W Spies (FF+) asked whether the figures provided in the last slide were hypothetical or actual figures. Clarity should also be provided on the average price of gas and how it affected the market.

Mr O Monareng (ANC) asked the Department to comment on why it was using outdated statistics, and whether the facts were still accurate. There needed to be some basis for attracting communities, and convincing people that gas was cheaper. The Department should comment on whether it was dangerous to use gas in low income households.

Adv H Schmidt asked for comment on when the Department intended to implement the proposed business model. He asked if there was any scope for following the methodology used in the fuel industry in the pricing of the LPG.

The Chairperson said that one needed to take into consideration the geographical energy space, and asked whether it had been taken into consideration in the pilot projects that had been launched. He asked the Department to comment on what had been done to harness the fuel cell technology sector. The Department noted that the poor communities were moving into mobilising a mass change from electricity and gas. He also asked for clarity whether it was possible to build a natural gas pipeline from neighbouring African countries to South Africa.

Mr Gumede replied that in regard to the price difference, the current prices were varied; however according to a snap survey that was undertaken it was established that the average price was R22.00 per kilogram. He noted that in South Africa, the current market for LPGs was a niche market. The Department was proposing a shift from a niche market to a mass market. In causing a shift in the market structure, it was hoped that there would be a shift in employment. In respect of the appliances, the Department was not proposing that the only carrier be electricity, nor was it proposing that household appliances be linked to gas. The Department was merely stressing the fact that for thermal purposes gas was far more efficient than electricity.

Mr Gumede noted that the idea was not to move people from the cheaper electricity to a more expensive gas system. The Department had shown that gas could be delivered at R9.09 per kilogram including VAT, and the Department was engaging with the industry. The Department had relied upon official statistics provided by Statistics SA. There were times when unofficial statistics were used, but these did not differ too much from the official statistics. The Department was hoping to publish energy data on an annual basis sometime in the near future. In regard to the use of electricity, the Department was trying to promote the use of an appropriate energy carrier for an appropriate application.

The Department needed to engage with the stakeholders extensively. The legislation process would take three or four months, and hopefully a workable legislation would be promulgated. With regard to the industrial application, the Department still needed to look at the possible industrial applications and see whether there were certain uses of energy which could lend themselves to gas. Insofar as cross subsidization was concerned, there may be a need to move from one sector to another, but the pricing and uptake must be considered before issues of cross subsidization were looked into. Gas was used in the transport sector in several countries. The Department was also in discussion with the World Bank to determine whether a gas pipeline could be built from Angola to South Africa.

Mr Mkhize added that the Department looked at the issues pertaining to pricing, and the excuse that was being used was that the service stations were convenience stores and therefore gas ought to be more expensive when bought from them. However service stations tended to be the only supplier of gas. Therefore the Department’s proposed pricing structure was the one that sought to streamline the value chain. An adequate price would be R10.72 per kilogram. There were several challenges that related to pricing, and the major challenge was the availability of LPG. The Department took note of the safety aspects of LPGs.

Ms Elizabeth Marabwa, Director: Petroleum and policy, Hydrocarbons, DME, was not sure why Members of the Committee were not invited to the previous presentation, but she assured the Committee that Members of Parliament would be invited for the official launch of the project.

Liquefied Petroleum Gas Safety Association of Southern Africa (LPGSASA) Briefing
Mr Dick Townsend, General Manager, LPGSASA, outlined the benefits, pricing, usage and storage of LPG. He noted that
some 70 000 homes received LPG cookers and low-cost fuel.  LPG would benefit South African society as it would provide 60 megawatts of new generating capacity at a cost of about R1.3bn. The capital saving of converting to LPG would be enormous. For low income households it had been proposed that the retail price of LPG be cross subsidised, and that the LPGs would be voluntarily self regulated by suppliers. A Memorandum of Understanding had been signed with the Department of Minerals and Energy (DME), in terms of which it was decided that LPGs would be R2 per kilogram less than the paraffin equivalent (namely, R14.07). It should also be noted that new additional road tankers and 500 000 new branded cylinders had been put into service. The Department of Minerals and Energy was negotiating with Spoornet to reinstate rail tankers, and there were also negotiations around the regulation of the retail price.

National Energy Regulator of South Africa (NERSA) Briefing
Dr Ethel Teljeur, Regulatory Member, NERSA, outlined the objectives of LPG price regulation, and how NERSA could assist in legislating, implementing, pricing and regulating a switch from electricity to natural gas. She noted that the difference between natural gas and LPG was that natural gas was piped gas whereas LPG was available in gas bottles, and was not regulated by NERSA. The advantage of LPG was that it provided a clean burning and effective source for water heating and cooking. However not all the advantages of LPG could be equally applied to natural gas. One of the preliminary observations of LPG retail regulation was that LPG was expensive and was in short supply domestically. There was also a lack of effective competition at the retail level. The LPG was predominantly used by the poor who had no other source of energy, and the World Bank had recommended that the industry should use natural gas as opposed to LPG. Therefore since piped LPG was regulated by NERSA, it would require an amendment that would enable NERSA to regulate all parts of the value chain.

A member of the ANC asked for comment on the gas safety association, and noted that unless something was done to address issues pertaining to gas safety then it would not be feasible for communities to turn to gas.  The project in which community members had to turn in electric stoves in exchange for gas stoves needed to be rectified. He further asked how it was possible for NERSA to regulate gas when it was such a scarce resource.

Ms E Ngaxela (ANC) asked for clarity on the appliances and whether the presentation had referred to a specific make, brand or company. If the presentation referred to a specific brand of appliances then there was a danger of creating monopolies in the market. The convenience stores refused to be regulated because they were only interested in making profit and exploiting communities. She therefore asked whether legislation could be introduced that would make gas affordable. NERSA was also asked to give an indication of how many providers there were.
Mr Kekana noted that the presenters did not seem to understand the Committee’s concerns. The Committee argued that raw material from mining and agriculture should be beneficiated in South Africa, so that more jobs could be created and skills could be enhanced. He had hoped that the presentations would have focused on how gas could save the aluminum smelter situation. Clarity should be provided on progress regarding the gas pipeline from Mozambique.

Mr Mahlaba commented that the NERSA presentation should have outlined how expensive LPG gas was, and should have provided alternatives of what else could be used. He asked for an indication of whether there was a cost effective way of how to promote the efficient use of LPG gas.

The Chairperson said that there had been confusion caused by the presentations as they provided conflicting reports on the cost of LPG. He asked that clarity be provided on the difference between the LPG and natural gas. Clarity should also be provided on why rail tankers had been withdrawn in the first place. None of the stakeholders spoke of other technologies used in the generation of energy.

Mr Townsend replied that the poor around the world tended to cook on LPG. The notion of LPG being dangerous had been propagated by the press, and he assured the Committee that the LPG cylinders were perfectly safe.  The stove exchange had ceased soon after introduction of the project after Eskom realized that there was a problem. People did receive their old stoves back, and Eskom decided to look into the matter further. The paraffin displacement project was an initiative launched in regard to safety, and the appliance provided was a gas stove which was available at a cheap price. The gas cylinders complied with international standards and there was a need to meet specification requirements. The cylinders were branded cylinders, and anybody could own and sell cylinders. In regard to the point raised around convenience stores, he noted that such stores needed to have a specific return on the investments, and would be easily willing to invest in other items such bread, milk, and sweets which would provide a guaranteed return, as opposed to gas.
Mr Mkhize added that gas was a lot safer than electricity and should not be feared. In regard to comments on beneficiation, he noted that the challenge in South Africa was that certain metals such as chrome could not be processed in South Africa, as there was no infrastructure available to reach the required melting point. Natural Gas and LPG were one and the same. The only difference was that natural gas had to be piped into every household, and no one would be willing to undertake such a huge investment, whereas LPG was available in cylinders. The best place to start would be portable gas and once a critical mass was reached, then one could look into natural gas.

Mr Townsend noted that LPG liquefied very easily under pressure, and was sold in liquid form at the refinery gate. The price at which the gas was sold at the refinery was known as the gate price. There was a complex process that the gas would go through before the wholesale price and retail price was determined.

Mr Mkhize added that availability and pricing were linked, and thus in order to address the price issue one needed to look at the value chain. Once these issues had been sorted out, one could determine the availability of the gas, and from there the price could be determined.

Dr Teljeur stressed again that LPG was available in cylinders, and natural gas had to be piped in. LPG was regulated by the Department, whereas NERSA regulated natural gas.  NERSA fully agreed with the conceptual issues that had been raised of the need to stimulate gas usage as an appropriate energy source. NERSA planned on investigating the conversion of heavy gas power facilities to natural gas in the near future. The largest obstacle was that the industrial users did not believe that there was a sustainable energy source in gas. In regard to LPG pricing, she commented that South Africa should try to compare itself with least developed countries. South Africa was not devoid of energy infrastructure, and it would be wrong to simply replace the low cost electricity with the very expensive LPG at this stage.
The meeting was adjourned.


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