Nersa proposes cap on gas price hikes to tame Sasol’s monopoly (original) (raw)

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The National Energy Regulator of South Africa (Nersa) is contemplating imposing price increase caps on gas in a bid to shield industrial users who contribute as much as R500bn to the economy annually from excessive price hikes from the dominant supplier, Sasol.

The country is navigating its way from an imminent gas cliff as Mozambican natural gas reserves supplying the market are expected to be depleted by mid-2030.

Sasol in November said it had made significant progress in the development of a methane-rich gas (MRG) supply solution aimed at ensuring continuity of gas supply to the South African market beyond June 2028.

This followed the technical feasibility of supplying MRG from its Secunda operations to external customers for a limited bridging period from July 2028 to June 2030.

MRG differs from natural gas in a key respect. Sasol is the sole producer, sole supplier and regulated trader, all within a vertically integrated group. This situation presents several risks that Nersa now has to grapple with.

Nersa is now reviewing the methodology it uses to determine prices charged to consumers and the possibility of a transition price escalation cap to protect affordability is on the cards.

“The methodology should address the risk of excessive price increases during the transition from natural gas to MRG, particularly given the significant economic role of industrial gas users, who represent 70,000 direct jobs and contribute an estimated R300bn–500bn annually to the economy,” the discussion document reads.

“Sudden, large price increases could have severe economic impacts, even if such increases are cost-justified. To manage this risk, the methodology could include an annual price escalation cap for the MRG transition period (July 2028 to June 2030).

“For example, if any approved MRG maximum price would result in more than a specified percentage increase (such as 20%–25% year on year) over the last approved natural gas maximum price, this would trigger a mandatory consultation process.”

Sasol is effectively the sole primary supplier of gas to the South African market. The depleting reserves from Mozambique have seen South Africa enter a period of structural change.

Declining supply from Mozambique, combined with the anticipated introduction of bridging fuel, MRG and the longer-term transition to LNG-based supply, is expected to alter the cost structure, risk profile and pricing dynamics of gas provision, Nersa warned.

The regulators’ discussion document said the pricing of MRG raises potential market power considerations, more so when the acquisition cost is determined through intragroup arrangements.

“To ensure robust cost verification, the methodology should require that any MRG acquisition cost submitted to Nersa be accompanied by an independently audited marginal cost of diversion,” the document reads.

“This means the actual cost Sasol South Africa incurs to redirect MRG from internal use to external supply (including foregone chemical and liquid fuels output plus incremental modification costs), rather than a fully allocated cost based on internal accounting conventions.”

The watchdog said the methodology it seeks after public consultation must ensure that the cost component of the price reflects the underlying economics of gas procurement in the South African market.

However, a key complexity arises in the case of vertically integrated firms, most notably Sasol, where the acquisition cost may reflect an internal transfer price rather than an arm’s-length transaction.

Nersa said this creates a structural risk of double recovery and it may have to look beyond internal transfer prices to the underlying production economics to prevent this.

“This risk is particularly significant in the South African context, where Sasol occupies a dominant position across both gas supply and infrastructure. As a result, the integrity of the cost of gas component depends heavily on the extent to which intragroup transactions are subject to effective regulatory scrutiny.”

When it announced it was progressing with the MRG solution, Sasol flagged that the successful implementation of the MRG solution was subject to approval of its maximum gas price application by Nersa.

It said at the time its application would reflect the cost of acquiring MRG from Sasol South Africa, the producer, and would be determined in accordance with Nersa’s pricing methodology.

The group, worth R150bn on the JSE, said on Monday that it was still studying the contents of Nersa’s discussion documents and their implications for its business.

“The regulatory framework applicable to gas pricing requires the regulator to balance the interests of all stakeholders in the gas market,” the company said.

“Accordingly, Sasol supports mechanisms that aim to balance affordability for customers with the interests of gas suppliers required to ensure sustainable gas supply.”