Natural Gas Pricing and How it Affects the Average South African
On 14 October 2022, the National Energy Regulator of South Africa (NERSA) will hold a public hearing on the methodology to approve maximum prices of piped gas in South Africa. The process of public consultation is ongoing and makes up much of NERSA’s core function in country, but this hearing is particularly pertinent to the gas industry in the region.
To outline it plainly, South Africa enjoys natural gas pipelines that run through certain geographical areas, providing piped gas to residential, commercial, and industrial users. Industrial users in areas such as KwaZulu-Natal or Ekurhuleni are likely to be billed by Sasol, whilst residential and commercial customers in Johannesburg most probably receive invoices from Egoli Gas. For those that are not pipeline connected, but require natural gas in their processes, Compressed Natural Gas (CNG) suppliers will fill the gap by trucking in molecules to various locations. Whomever your supplier may be, the common denominator is that the price of gas directly affects the cost of living for everyday South Africans.
To better understand the current NERSA predicament, a good place to start is March 2021. It is here that they followed the crucial path in the Sasol Gas maximum price methodology. The methodology sets out two approaches:
- For gas from existing gas sources, maximum gas prices are based on a “competitive benchmark approach”, set against a weighted average price of international pricing hubs, namely USA Henry Hub (40%), UK National Balancing Point (10%) and Dutch Title Transfer Facility (50%).
- For gas from future supplies, including LNG imports and third-party resellers, gas prices are benchmarked against contract prices of LNG in Japan + transport to, and regasification in South Africa (a “pass-through” approach).
By September 2021, Sasol had implemented a revised Actual Gas Energy Price to “enable compliance with the NERSA decision”. This results in the removal of a ‘declining block pricing mechanism’, and the implementation of a ‘single approved price’. This ‘pricing equality’ resulted in savings for smaller gas users, but saw significant tariff increases for large industrial customers (5% – 15%).
For FY22, the Maximum Price was set at R68.39/GJ. After factoring in relevant transmission tariffs, this translates to a net gas price of R107.69/GJ for SustainPower’s power generation clients.
By the end of the year, large gas users had started to see the potential for dire consequences for the economy and formally applied to the High Court to set aside NERSA’s new gas price methodology, as it is based on world gas prices which do not take South African market conditions into account. Essentially, they argued that the competitive benchmark approach is completely irrelevant to the South African market, and its supply from Mozambique.
How does this affect the average South African? One need only look at the industries that make use of large quantities of gas. Glass, sugar processors, food packagers, canned goods, and bakeries all use natural gas to power their processes. It now becomes clear how a rise in gas prices can be detrimental beyond the industry itself.
Russia’s invasion of Ukraine has exasperated the situation and resulted in record high global gas prices. The competitive benchmark approach leaves South African gas users highly vulnerable, as 50% of the price is pegged against the DTTF and as such, the European market.
By March, NERSA had published a consultation paper regarding the interim methodology for setting maximum gas prices. They recognize that if the prevailing methodology is strictly enforced, piped-gas prices will rise from R68.39/GJ to R252/GJ in July 2022. NERSA intend to decide on the interim methodology by the end of April 2022 and finalize the permanent methodology by August 2022.
In August, Sasol responded by informing NERSA and its customers that the maximum price of piped gas will increase to R133.34/GJ, amounting to a 96% tariff increase. Sasol suggest that if they had strictly followed the methodology (approved by NERSA), the price would have been R273.43/GJ.
Gas users responded by arguing that NERSA should adopt a methodology that uses Sasol’s cost base as the main reference point for setting the price. It should be noted that in 2019, the Constitutional Court declared a previous price formula, which used a reference basket of alternative fuels, to be irrational and unlawful. Gas users argue that the current benchmark approach is even more unreasonable and monopolistic.
NERSA reiterated that it had not approved Sasol’s 96% gas price hike and said that a maximum price arising from Sasol’s application of the methodology is “well below R100/GJ”. In response, Sasol have since delayed their 96% gas hike, pending ‘engagement with NERSA’. It continues to charge the FY22 price of R68.39/GJ, but the uncertainty gives potential gas-to-power clients pause.
What remains clear is that Gas-to-Power projects will have a significant role in South Africa’s transition from a coal-based national grid to a more diversified mix. Natural gas emits approximately 50% less CO2 than coal and is far cleaner than diesel standby gensets. Even relatively high gas prices leave SustainPower’s units with significantly cheaper Rand/kWh running costs, when compared to municipal electricity tariffs, which continue to increase at a rate that far exceeds inflation. We look forward to NERSA’s final determination, so that we can begin to roll out the incredibly attractive business cases in our project pipeline.