1. PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG PRICE REGULATION and PILOT PROJECTS 22 February 2011 Hydrocarbons & Energy Planning Team Tel: 012 444 4012/5

2. Presentation Outline Price Adopted approach Retail Price Regulation o Main events o Stock-taking workshop issues o General limitation o Composition of the regulated max. LPG retail price o History of the max. LPG retail price since implementation of regulation on 14-Jul-10 Pilot Projects o Overview o Employment figures o Identified successes and weaknesses Way Forward

3. Adopted approach Ensuring Access by poor “Free basic energy” provision Price regulation Availing cylinders and appliances to the LIH Focus in LSM’s that can afford LPG Exchange unsafe appliances For those poor LIH’s who can’t afford to buy LPG, exchange 50kW free electricity for say 15 kg LPG per month Reduction of current industry wide high prices Investigate sharing of logistic value chain Investigate cylinder filling options

4. Main Events Inaugural regulation of the maximum retail price of LPG supplied to residential customers on 14-Jul-10 o Some stakeholders alleged that they were being squeezed out of business while others applauded the regulation and the concomitant price reduction Stock-taking workshop with relevant stakeholders on 23-Nov-10 o Concerns raised and working group formed to address these concerns o Stakeholders were requested to forward their inputs by 17-Dec-10 – some stakeholders submitted Follow meeting of working group representatives held on 19-Jan-11 o Allocation of representatives to the various working groups

5. Stock-taking workshop issues (1) LPG Maximum Refinery Gate Price (MRGP) is based on 93 octane movements within the Basic Fuels Price (BFP) mechanism whereas the import price of LPG is based on Saudi prices  Included in the Dept’s 2011/12 deliverables. Stakeholders invited to make submissions Non-regulation of the wholesale price o Wholesalers can still charge higher prices which eat into the margins of retailers o Most retailers have franchise agreements with wholesalers and consequently, do not have the option of sourcing LPG from other wholesalers with lower LPG prices Management and filling of LPG cylinders o Cross-filling and hoarding of cylinders still not adequately addressed o Concern: who takes responsibility regarding safety issues when the filling of cylinders has been done by various parties Playing field not yet leveled for participation of BEEs o Admin fees charged by refineries o Products ex-refineries committed to their wholesaling arm

6. Stock-taking workshop issues (2) Safety Issues o Adequate incorporation and administration of safety element in the LPG pricing structure  LPG Association undertook to provide a thought-through proposal Review of the Magisterial District Zones (MDZ) pricing system o Revision of the LPG MDZ system to removing any inconsistencies in the determination of LPG transport costs through the various zones  Included in the Dept’s 2011/12 deliverables. Stakeholders invited to make submissions Zero rating for VAT of LPG was suggested by some stakeholders o Adequate incorporation and administration of safety element in the LPG pricing structure  Not accepted but will monitor developments and landscape changes Domestic / Residential vs. Commercial Prices o Some stakeholders were concerned that LPG sold to residential customers could actually be used for commercial activities.  Earlier indications: commercial customers got quantity discounts & therefore matter a non-issue. Stakeholders need to prove the contrary.

7. Stock-taking workshop issues (3) Incorporation of a regular Review Mechanism of Working Rules o Clear set timeframes or trigger mechanisms for the review / revision of working rules o Implementation of a framework for annual or periodic adjustments of particular price elements

8. General Limitation Stakeholders are concerned about discussing issues raised in the working groups for fear of being deemed to have contravened competition laws. Agreed upon solution in the meanwhile: all issues to be discussed under the chairmanship of an official from the Department

9. Composition of Max LPG Retail Price (c/kg) w.e.f. 2-Feb-11

10. History of Max. LPG Retail Prices (c/kg) since implementation of regulation on 14-Jul-10 DateCoastGautengIncrease/ (Decrease) 14 July 20101,569.001,727.00 04 August 20101,619.001,801.0074.00 correction in application of Rules and increase in product prices 01 September 20101,593.001,775.00(26.00) Decrease in product prices 06 October 20101,586.001,768.00(7.00) Decrease in product prices 03 November 20101,618.001,800.0032.00 Increase in product prices 01 December 20101,635.001,817.0017.00 Increase in product prices 05 January 20111,681.001,863.0046.00 Increase in product prices 02 February 20111,722.001,904.0041.00 Increase in product prices

11. Pilot Projects: Overview To test the efficacy of the proposed approach, pilots have been undertaken in Atteridgeville, Tshwane Metro, Gauteng [20,000 households] and Tweefontein South and North, Thembisile Hani Municipality, Mpumalanga [10,000 households] Switch users from electricity to LPG for thermal applications o Per household subsidy: 1x 2plate stove, 2x 6kg cylinders & 1 x Sapphire heater o Bottle filling plants have been constructed in both municipalities Gain policy insights, particularly related: o Energy security: security of supply and demand; logistical chain / access o Economics: capex and opex; LPG retail price for households / affordability o Holistic viewpoint - PESTEL o Impediments and challenges Capture lessons, close pilot phase and roll-out o A service provider, SSER was appointed in February 2007 to run the pilot o Closure of pilot phase and further roll-out: (1) SOE (PetroSA); (2) Open bidding

12. Pilot projects: Employment figures Pilot project inception o door-to-door distribution of appliances mode: locals employed on contract basis [as Warehousing personnel, Door-to-door roll out personnel, LP Gas fillers, Project managers, Safety and educational agents, Marketing/Service agents, Drivers and security]: 110 in Atteridgeville and 97 in Tweefontein o Centred distribution mode: locals employed on contract reduced to 85 in Atteridgeville and 70 in Tweefontein after switching to distribution via centres (e.g. community halls) and retained door-to-door mode for senior citizens. Operating Mode o Initially: more employees upon commissioning of the pilot plant. o Later: SSER changed its operating mode and used local vendors for the distribution of LPG to customers (i.e. the current operation)

13. Pilot Projects: Identified successes 2 Bottle filling plants were constructed, commissioned and are operational Department facilitated an LPG upliftment contract for service provider with a refiner - SASOL ± 90% households were supplied with LPG LPG usage accepted by communities where project is located Local people were employed throughout the phases of the pilot The DSM aspect of the pilot positively proven and independently verified (1377 MWh shift in Tshwane & 2607.27 MWh shift in T Hani) Safe usage of LPG as a result of training has been achieved and no accident reported in pilot areas Both municipalities have expressed an interest in expansion of pilot to cover broader areas within their respective jurisdictions Draft LPG pricing regulations are but one outcome of the pilot

14. Pilot Projects: Identified weaknesses Management of the project by service provider has not been satisfactory – cash flow problems; management capabilities Contractual breaches by service provider – erratic supply of LPG, non-delivery to households, unavailability of a paid-for Information Management System Poor marketing of the project – lesser LPG consumption Appliance distribution to households poorly managed Poor quality of appliances – heaters Scope for project management up-skilling by all involved No much headway w.r.t. further roll-outs – pending formal response from PetroSA

15. Way Forward Conclude all matters raised within 2011/12 FY Sustain stakeholder engagement and ongoing monitoring and enforcement o Cooperation with stakeholders (DoL, LPGSASA, etc.) i.r.o. cylinder management and safety issues Include LPG licensing dispensation and LPG Strategy implementation in 2011/12 FY programme o DoE/ Transnet Ports Authority engagements – (im)port infrastructure o LPG in the Free Basic Alternative Energy (FBAE) Policy considerations Get written response from PetroSA regarding taking over pilot projects and proceed with other alternatives o Have verbally indicated that it would not be viable for them to take over the pilot sites o Focused attention: pilot phase to commercial phase

16. Ke ya lebogaThank you Ke a leboha Ke a leboga Ngiyabonga Ndiyabulela Ngiyathokoza Inkomu Ndi khou livhuha Dankie