New market inquiry aims to free up gas supply in SA
THE Competition Commission is studying ways to improve competitiveness in the market for liquefied petroleum gas (LPG), which it says could become an affordable alternative energy source for households.
LPG, a by-product of the oil-refinery process, is mainly used for heating and cooking.
Only about 3% of households use LPG as their main energy source for cooking, according to statistics from the Department of Energy.
“The demand for LPG seems to be growing as more users diversify their energy mix in response to, among others, the power shortfalls and the increasing electricity price,” said the commission.
“LPG is of strategic importance in an economy struggling with rising energy prices and an electricity supply under severe pressure.”
Unlike the commission’s usual investigations, which focus on the behaviour of individual firms following complaints, a market inquiry is a general investigation into the state, nature and form of competition in a market.
To unlock investment, an appropriate framework needs to be put in place
The commission said it had reason to believe that the LPG sector had features that prevented, distorted or restricted competition.
One of the issues potentially hampering competition is the limited supply of LPG, which is “likely to confer substantial market power to the major resellers that are able to secure a supply of LPG from the refineries”.
Although the Department of Energy sets a maximum refinery gate price and a maximum retail price for LPG, the price wholesalers charge industrial, commercial and retail clients is not regulated.
The market is dominated by a small number of resellers, mainly Afrox, Easigas, BP South Africa and Total Gas, and a number of brokers who receive an allocation of LPG from the refineries and sell it on to wholesalers.
The wholesaling of LPG is relatively capital intensive and requires investment in bulk transporters, tankers, storage facilities, cylinder-filling plants, cylinders, delivery vehicles and installation on customers’ premises, further hampering new entrants to the market.
Other concerning factors in- clude the high switching costs for commercial and industrial customers, limiting their ability to pick a different wholesale supplier, and the limited imports of LPG, which are regarded as insufficient to provide a competitive restraint to the LPG supplied by refineries.
Currently, South Africa can import a maximum of 6 100 tons of LPG a year through facilities at Richards Bay, Durban and Port Elizabeth harbours.
Sunrise Energy is constructing an import facility in Saldanha Bay in the Western Cape.
About 300 000 tons of LPG is manufactured and sold in South Africa annually, generating a turnover of about R1.5-billion.
The small size of the market had not warranted larger-scale infrastructural investment for the import and distribution of bulk LPG, said the commission.
It will also look at concerns that the regulated refinery gate price is discouraging imports.
Avhaphani Tshifularo, executive director of the South African Petroleum Industry, said it was unclear what the intention of the commission was.
The study would be helpful to understand the market, “identify the real issues” and ensure steps were taken for LPG to play its role in the country’s energy mix, said Tshifularo.
“To unlock investment, an appropriate framework needs to be put in place.”
Simon Miller, a spokesman for Afrox, said the company was studying the terms of reference and would co-operate fully with the investigation.
The market inquiry is only the second to be launched in the commission’s history and follows a study of the private healthcare sector announced in January.
The LPG study was expected to be finalised by October 2015, said spokesman Themba Mathebula, followed by the healthcare study at year-end.