South Africa: Gas pricing mechanism puts industrial players in a pickle

By Xolisa Phillip, in Johannesburg
Posted on Friday, 14 October 2022 11:42, updated on Tuesday, 18 October 2022 16:41

A worker looks on next to liquefied petroleum gas (LPG) cylinders, as locals resort to using it as a backup energy supply during frequent power outages from South African utility Eskom, caused by its ageing coal-fired plants, in Soweto, South Africa July 1, 2022. REUTERS/Siphiwe Sibeko

Aggrieved by South Africa’s shift to a mechanism that ties gas prices to global turbulence, consumers are taking legal action to reverse the decision as the industry community is disgruntled with the fossil fuel’s rising cost in the country.

With natural gas entrenched in multiple manufacturing processes, the soaring prices might be “the final straw” for the battered industrial sector, warns Jaco Human, the executive officer at the Industrial Gas Users Association of Southern Africa (IGUA-SA).

“You are talking about a R10bn-a-year ($553m) cost impact to the economy,” he tells The Africa Report. “This is not only in the business-to-business world …, [but] also in the business-to-consumer world.

“That doesn’t bode well for industry, employment, and the economy at large,” says Human. “For many years, manufacturing has been under pressure – whether it’s Eskom or inefficient logistics systems. This impact could be the final straw.”

More than triple

Sasol, the listed global chemicals and energy producer, monopolises the supply, transmission, and distribution of piped gas into South Africa from the Pande-Temane fields via the Republic of Mozambique Pipeline Investment Company pipeline. The company provides piped gas to industrial customers in Gauteng and the Free State.

The National Energy Regulator of South Africa (NERSA) relies on benchmark hubs using the prevailing gas prices of the Dutch Title Transfer Facility (TTF), the UK’s National Balancing Point (NBP), and the Henry Hub (HH) in the US as references. The framework emulates the conditions of a competitive market.

Under the NERSA benchmark, Sasol is permitted to charge a maximum gas price of up to R240/gigajoule (GJ), more than triple what industrial users have been paying, around R68/GJ, Human points out.

“The situation was compounded by the invasion of Ukraine by Russia,” says Human. “That catapulted an already stressed market into the stratosphere as far as pricing is concerned. The global markets are still reeling from this [Russia-Ukraine conflict-induced price distress].”

‘Flawed’ method

Human says the IGUA-SA reckons that the NERSA hub methodology is “fundamentally flawed”, saying one of its unintended consequences is exposing domestic users to global factors, including the Russia-Ukraine conflict that has shrunk Europe’s gas supply and driven up international prices dramatically.

“[There has been an] … imbalance between renewable and baseload power generation in Europe. Gas demand went up, and prices started to skyrocket,” he says. “All these hubs – TTF, NBP, and HH – then started climbing to dizzying heights. That has a bearing on the Sasol gas price.”

Human says some IGUA-SA member companies are reconsidering further investments and capital expansion programmes, while others are looking to relocate from South Africa. “Some of our users are saying, ‘If gas pricing in South Africa is not going to work, I will pack up and go elsewhere’.”.

Legal action

The IGUA-SA has lodged a dispute against the regulator at the high court and filed an excessive pricing complaint against Sasol at the Competition Commission.

It has also approached the Competition Tribunal, on an urgent basis, for interim relief as the Competition Commission investigates the industry’s price complaint against Sasol. The Competition Tribunal matter is to be heard in due course.  The association argues that the FFT, NBP, and HH markets have nothing to do with the South African gas market and its dynamics.

This now appears to be more anchored on Sasol’s cost base

Sasol says the IGUA-SA alleges in its latest high court application “… that the NERSA decision is unreasonable and irrational as the decision does not mimic a competitive market and fails to comply with the directives contained in the … [2019] Constitutional Court decision”.

“NERSA and Sasol Gas will oppose the application,” Sasol said in August in the company’s financial disclosure for the year ending 30 June 2022. The company also said it has approached affected customers with a “bespoke settlement offer” to resolve the retrospective liability.

More anchored

The IGUA-SA’s fiercest gas price dispute with NERSA dates back to 2013 when the regulator introduced a basket of alternatives that served as the official framework from 2014 to 2017.

Gas users instituted a court challenge against the methodology. In 2019, the Constitutional Court invalidated it, saying it was unlawful and irrational, a ruling that was implemented retrospectively. The ruling meant Sasol had to recalculate gas charges during the period from 2014 to 2017 and refund consumers where applicable.

However, in the meantime, Human says NERSA has issued a consultation document on a third maximum price methodology. “This now appears to be more anchored on Sasol’s cost base. It is a step in the right direction in terms of law and economics,” he says.

“But there are still many blind spots in this methodology. NERSA has said that they aim to have a third methodology implemented by April next year. We will see if the timelines are achievable.”

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