PIPED-GAS REGULATION FEBRUARY 2017

PIPED-GAS REGULATION FEBRUARY 2017

Disclaimer This frequently asked questions document (FAQ) is developed in the context of the liquefied natural gas (LNG) to Power IPP Procurement Programme currently designed by the Department of Energy s IPP Office for the development of two LNG to power projects in South Africa in the near future, and is part of the concerted effort by the National Energy Regulator (NERSA) to provide regulatory clarity and assistance to stakeholders on gas matters where possible. This FAQ is intended to clarify, explain, and promote better understanding of the requirements of the Gas Act, 2001 (Act No.48 of 2001) (the Gas Act) regarding the regulation of gas infrastructure developed as part of LNG to power projects in South Africa, including LNG storage and regasification, and gas pipeline facilities as well as the associated gas importation, storage, regasification, transmission and trading activities. The frequently asked questions and answers presented in this FAQ are not substantive rules and do not create rights, assign duties, or impose new obligations not outlined in the regulations made by the Minister in terms of section 34(1) of the Gas Act as well as the existing rules and methodologies published by NERSA. The FAQ will be a living document to keep it relevant to the constantly changing industry dynamics and to align it with changes in the energy policy landscape, as well as changes in the gas legislation/ regulatory framework as they occur. Consequently, updates will be made available on the NERSA website when necessary. Additional specific questions relating to the regulation of LNG to power projects in terms of the Gas Act not addressed in the FAQ can be sent to pipedgas@nersa.org.za. Page 2 of 21

FREQUENTLY ASKED QUESTIONS AND ANSWERS Mandate/Responsibilities Question 1: Which legislation is applicable to the project value chain? Midstream and downstream Gas Act, 2001 (Act No.48 of 2001) and the associated regulations and Rules the Piped Gas Regulations published under GN R321 in GG29792 of 20 April 2007 and the Gas Act Rules, 2009 Electricity Regulation Act, 2006 ( Act No. 4 of 2006) and the associated Regulations National Ports Act, 2005 (Act No.12 of 2005) and the associated Regulations Environment National Environmental Management Act, 1998 ( Act No. 107 of 1998), and the associated Regulations Question 2: What agencies have regulatory authority over the LNG to power project? Three regulatory authorities share oversight at different stages of the project value chain, namely National Energy Regulator (NERSA) Transnet National Ports Authority (TNPA) Department of Environmental Affairs (DEA), which deals with environmental permits/authorisations required throughout the project value chain. Page 3 of 21

Question 3: Which parts of the project value chain does each authority regulate or oversee? LNG importation, storage and regasification NERSA regulates the LNG storage and regasification activities and the associated LNG storage and regasification facilities. NERSA does not regulate the importation of gas (in this case LNG) but is required to register the associated operations in terms of section 28 of the Gas Act. TNPA also has a mandate to oversee the LNG terminal operations within the port boundaries in terms of the National Ports Act. Gas pipeline transportation NERSA regulates the midstream transportation of gas from the LNG regasification facility through the gas transmission pipeline to the power plant in terms of the Gas Act. The transmission of gas for own exclusive use is not regulated, but the operation is subject to registration in terms of section 28 of the Gas Act. Power generation NERSA license the operation of the power generation plant in terms of the Electricity Regulation Act, 2006. NERSA notes the power purchase agreements (PPAs) between IPPs and Eskom. Question 4: What is the role of the IPP Office in the LNG to power programme? The IPP Office is responsible for the implementation of the independent power producer programme, including the gas IPP procurement Page 4 of 21

programme, to give effect to the Integrated Resource Plan for electricity generation 2010-2030. The IPP Office is also responsible for the design of the IPP programmes, the bidding process and selection of the preferred bidders for the respective programmes, including gas. Question 5: Where does NERSA fit in the process? NERSA will regulate the gas infrastructure involved in the project, the price of gas, the LNG storage tariff and the gas transportation tariff in terms of the Gas Act. NERSA will also regulate the power generation infrastructure in terms of the Electricity Regulation Act, 2006. Project participation Question 6: Does the Gas Act prevent vertically integrated companies from participating in the programme? No, the Gas Act does not prevent vertical integration, companies are allowed to participate in all segments of the gas value chain. All gas infrastructure involved in the LNG to power project will be regulated in terms of the Gas Act irrespective of whether the project is bundled or unbundled or the project developer is vertically integrated. Question 7: Does the Gas Act place limitations on international companies regarding their participation in the gas infrastructure project? No, the Gas Act does not place limitations on international companies as far as their participation and investment on the gas infrastructure project is Page 5 of 21

concerned. All questions regarding the project participation, except those relating to the Gas Act, should be directed to the IPP Office. Question 8: Are there specific BEE requirements that participating companies would be expected to comply with in terms of the Gas Act? The IPP Office will provide clarity on the BEE requirements during the request for qualification or proposal stage of the procurement process. However, the Gas Act seeks to promote companies in the gas industry that are owned or controlled by Historically Disadvantaged South Africans (HDSAs) by means of licence conditions so as to enable them to become competitive. Thus, companies licensed in terms of the Gas Act are required to submit periodic information relating to HDSA participation in the businesses concerning their licensed activities. Question 9: Does the Gas Act prescribe the types of business models for this kind of projects? No. Licensing/registration of gas activities (General questions) Question 10: Which activities of the LNG to power project value chain are licensed by NERSA in terms of the Gas Act? NERSA is required in terms of section 15 of the Gas Act to issue licences for: The construction and operation of the LNG regasification facility Page 6 of 21

The construction and operation of the gas transmission pipeline facility between the LNG regasification facility to the power generation facility The construction and operation of the gas storage facility (if applicable) Trading in gas The company importing the LNG will also be required to register its LNG importation operation with NERSA in terms of section 28 of the Gas Act. Question 11: Who should apply for the required licences? Section 15 of the Gas Act requires any person engaged in the activities listed therein to hold a licence issued by NERSA. The Gas Act does not limit the parties that should apply for a licence to owners of the facilities. Question 12: How do I apply for a licence? Licence applications should be submitted to NERSA in terms of the Rules made under section 34 of the Gas Act (i.e., the Gas Act Rules, 2009). Copies of the Rules are available on www.nersa.org.za under Piped Gas > Legislation > Gas Act Rules Question 13: Is it possible for an applicant to submit applications for the construction and operations licences for a facility, as well as the gas trading licence simultaneously? Yes, the Gas Act does not prevent applicants from simultaneously applying for construction, operation and trading licences. However, the applicant must submit separate applications for each activity in the manner prescribed in the Gas Act Rules. Page 7 of 21

Question 14: Can NERSA issue combined construction and operation licences for the facility, and the trading licence in terms of the Gas Act? No, section 19(4) of the Gas Act requires NERSA to issue separate licences for the construction and operation of gas facilities, and for trading in gas. Question 15: Given that the requirements for the construction and operation licence applications are co-dependent, is it possible for NERSA to consider and decide on these applications at the same time? Yes, it is possible for NERSA to consider and to decide on licence applications for the construction, operation and trading activities simultaneously for as long as the individual applications meet the minimum requirements prescribed in the Gas Act Rules. Question 16: Does the DoE s LNG to power programme prevent NERSA from considering other licence applications for the development of gas infrastructure outside the programme? No. Applications for licences submitted to NERSA in terms of the Gas Act are considered on a first come, first served basis and there is no requirement for a competitive bidding process in the Gas Act. Licence applications submitted to NERSA are considered on their own merit in accordance with the prescripts of the Gas Act. Question 17: Which activities of the LNG to power project value chain are exempt from licensing in terms of the Gas Act? Page 8 of 21

The transmission of gas for own exclusive use, of which NERSA views as the operations aspect of the gas transmission pipeline between the LNG regasification facility and the gas power plant, is exempt from licensing in terms of the Gas Act. Question 18: In the context of the gas to power project, when would the transmission of gas be regarded as transmission of gas for own exclusive use? The activity would be regarded as transmission of gas for own use when: The project is bundled (i.e., the project is owned by a single legal entity or consortium which takes the full risk of the gas transmission pipeline, LNG importation and the power plant); and The sole purpose of the transmission pipeline is to transport gas to the power plant, i.e., no third party access (TPA) provisions to the pipeline. OR When the IPP imports the LNG, own the gas transmission pipeline (with no TPA provision), and the power generation plant downstream. Question 19: How does the licensing activity differ from the registration activity? Licensing requires NERSA to follow an administrative process which include an extensive public consultation process leading up to the decision. The licence is issued with licence conditions of which the licensee is expected to comply with for the duration of the licence. The process for the registration of a gas activity is not as extensive as licensing but it is also used to gather information on small-scale developments in the industry. Registrants are issued with a registration number and are required to submit annual information in terms of Regulation 9 of the Piped Gas Regulations. Page 9 of 21

Question 20: Which activities of the project value chain require registration in terms of the Gas Act? The operations for the importation of LNG and the transmission of gas for own use should be registered with NERSA in terms of section 28 of the Gas Act. Question 21: What happens after the licence application has been approved? The applicant will be issued with a licence and licence conditions under which the licensed activity must be carried out. NERSA will monitor and enforce the licensee compliance with the licence conditions. Question 22: How would changes in the facility design or construction plans affect the construction licence? The licensee must apply to NERSA to have its construction licence amended in terms of section 24 of the Gas Act. The application form for an amendment of a licence is prescribed in Annexure E of the Gas Act Rules, 2009 available on www.nersa.org.za. Page 10 of 21

Regulation of LNG storage and regasification Question 23: Does NERSA consider the floating storage and regasification unit (FSRU) a regasification facility in terms of the Gas Act? Partly yes. The FSRU has two components comprising the LNG storage tanks and the LNG regasification plant. NERSA would treat the LNG storage tanks and the incidental equipment such as the LNG offloading arms as a storage facility; and the regasification plant including the LNG vapourizers and incidental equipment as a regasification facility. Question 24: How would NERSA license the FSRU? NERSA would issue separate licences for the LNG storage tanks and the LNG regasification plant The LNG storage tanks would be licensed as a storage facility and the LNG regasification plant would be licensed as a regasification facility. Question 25: What influences NERSA s position to license the LNG storage tanks within the FSRU as a storage facility given that in practice the LNG tanks are viewed as auxiliary equipment to the LNG regasification process? The LNG storage tanks within the FSRU could be utilised for dual purpose (i) to store LNG for regasification either for the IPP or as a service to other customers, and (ii) to store LNG as a service for any party. Page 11 of 21

Thus, in the event that the storage tanks within the FSRU are used to provide a storage service to other parties, a separate licence to operate the tanks as a storage facility would be required. Question 26: Regulation 7(15) of the Piped Gas Regulations exempts storage tanks that are part of the process of and within the regasification plant from mandatory third party access, what would be the impact of NERSA s preferred licensing approach for the LNG storage tanks within the FSRU on this regulation? NERSA is of the view that Regulation 7(15) exempts the LNG storage tanks only from mandatory third party access. This does not imply that the storage tanks should not be licensed separately as a storage facility. Again, this does not imply that the facility could not be utilised to store LNG as a service for other parties. In the event that the storage tanks are utilised to provide a storage service, the provisions of the Gas Act relating to storage tariffs would apply. Question 27: Which licences are required for the FSRU? Given that the FSRU would be pre-fabricated before it reaches the South African shores, owners or operators of the facility would require A licence to operate the LNG storage tanks as a storage facility; and A licence to operate the LNG regasification plant as a regasification facility. Question 28: Does the FSRU require a construction licence? No. Page 12 of 21

Question 29: Would NERSA regulate the tariffs associated with the FSRU infrastructure, and how? NERSA has a mandate to regulate the LNG storage tariffs, but currently does not have a mandate to regulate the regasification tariffs. Section 4(h) of the Gas Act empowers the Energy Regulator to monitor and approve, and if necessary regulate tariffs for gas storage facilities, amongst others. NERSA has developed guidelines for approving gas transportation and storage tariffs in South Africa that licensees are required to comply with when submitting their tariff applications to NERSA. The guidelines are available on www.nersa.org.za under Piped-Gas > legislation > methodologies/guidelines. Question 30: When would the regulated tariff be applicable? Regulated tariffs would be applicable when gas or LNG is stored as a service for another party in the LNG storage tanks. Question 31: Would NERSA be bound to accept a tariff submitted as part of the gas IPP bidding process? NERSA has a responsibility to conduct a prudency and efficiency test on costs and revenue requirements when processing a tariff application. To ensure that the NERSA tariff application process is aligned with the outcomes of the bidding process, NERSA is working with the IPP Office to ensure that the minimum requirements set out in the tariff guidelines published by the Energy Regulator are included or considered in the bidding documents. Page 13 of 21

Question 32: How does NERSA define third party access? Third party access (TPA) is not explicitly defined in the Gas Act, however the access provisions in the Gas Act connote the generally accepted principles of regulated TPA which requires that a right of access to a gas facility is given on the basis of a published tariff and other terms and obligations for the use of the facility. Question 33: Which parts of the FSRU are subject to regulated third party access? None Regulation 7(15) exempts the LNG storage tanks from mandatory third party access. However, this does not prevent owners or operators from granting access to the facility on non-regulated terms and conditions. The Gas Act is silent on the issue of third party access to regasification facilities, however this does not prevent owners or operators of the regasification plant to offer LNG regasification services to other parties. In this instance, third party access would be provided on negotiated terms and not regulated by NERSA. Question 34: Which access regime is applicable to the LNG storage facility in South Africa? The Gas Act makes provisions for third party access to uncommitted capacity in gas storage facilities. This mandatory third party access is subject to a regulated tariff as well as regulated terms and conditions for providing access to the facility as prescribed in Regulation 7 of the Piped Gas Regulations. Page 14 of 21

Question 35: What are the requirements for third party access in gas storage facilities in South Africa? TPA is only applicable to uncommitted capacity available in the storage facility. This is capacity determined by the Energy Regulator in a storage facility as is not required to meet contractual obligations. Users will pay a regulated storage tariff to access the storage facility. Regulation of gas transmission facilities Question 36: The LNG to power project value chain consist of cryogenic and high pressure gas transportation pipelines, which parts of the pipelines would be regarded as a gas transmission facility in terms of the Gas Act? The pipeline transporting the regasified LNG from the FSRU to the power plant and/or to other parties will be regarded as a gas transmission facility in terms of the Gas Act. This pipeline would operate at pressures from 15 bar gauge. Question 37: How would NERSA treat the cryogenic pipeline transporting LNG from the FSRU to the small-scale LNG operations if applicable? The cryogenic pipeline will be treated as an auxiliary equipment to the LNG storage tanks and would be licensed as part of the LNG storage facility. This pipeline cannot be regarded as a gas transmission pipeline because the Gas Act mainly uses atmospheric pressures to distinguish between gas reticulation, distribution and transmission activities; thus the cryogenic pipeline does not fall in any of these categories. Page 15 of 21

Question 38: Which licences are required for the gas transmission pipeline? Licences for the construction and the operation of the gas transmission facility would be required in terms of section 15 of the Gas Act. Question 39: What if I am transmitting gas for own use as the IPP, would I still require a licence? As discussed in question 17, the transmission of gas for own exclusive use is exempt from licensing. NERSA regards this activity as the operations aspect of transporting gas from the FSRU to the power plant however, a licence to construct the pipeline would be required in terms of section 15 of the Gas Act. Question 40: Would NERSA regulate the gas transmission tariff? Yes, NERSA has a mandate to regulate gas transmission tariffs (which refers to charges for gas transmission service through the transmission pipeline). Section 4(h) of the Gas Act empowers the Energy Regulator to monitor and approve, and if necessary regulate tariffs for gas transmission facilities, amongst others. NERSA has developed guidelines for gas transportation and storage that licensees are required to comply with when submitting their tariff applications to NERSA. The guidelines are available on www.nersa.org.za under Piped-Gas > legislation > methodologies/ Guidelines. Page 16 of 21

Question 41: Which access regime is applicable to gas transmission pipelines in South Africa? The Gas Act makes provisions for third party access to uncommitted capacity in gas transmission facilities. This mandatory third party access is subject to a regulated tariff as well as regulated terms and conditions for providing access to the transmission pipeline as prescribed in Regulation 6 of the Piped Gas Regulations. Question 42: What are the requirements for third party access in transmission pipelines? TPA is only applicable to uncommitted capacity available in the transmission pipeline. This capacity is determined by the Energy Regulator in a transmission facility as is not required to meet contractual obligations. Users will pay a gas transmission tariff to access the pipeline. Question 43: How would NERSA determine uncommitted capacity? NERSA uses technical expert advisors to conduct studies to determine uncommitted capacity in existing pipelines. The transmission licensee is also required in terms of Rule 20 of the Gas Act Rules to publish information relating to uncommitted capacity in the pipeline facility as and when directed to do so by the Energy regulator. Licensees are often advised to publish such information on their company websites. Page 17 of 21

Question 44: Which capacity allocation mechanism should the transmission pipeline operator put in place? The capacity allocation mechanism employed by the licensee should comply with the principles stated in Regulation 6 (2) of the Piped Gas Regulations, including the use-it-or-lose-it capacity management procedure and non-discrimination. Capacity may be provided on the first come, first served basis However, the Regulations require that in the case of competing applications for access to uncommitted capacity in the pipeline received on the same day, priority must be allocated according to the most attractive application to the licensee based on the proposed volumes, revenue and length of contract. Question 45: If I am transporting gas for own use, would TPA still apply? There is no requirement for mandatory third party access for pipelines transporting gas for own exclusive use. Question 46: How do I get access to the transmission pipeline? Third parties can approach the facility owner with requests to gain access to the transmission pipeline. The terms and conditions of access to the pipelines are informed by the third party access codes that licensees submits to the Regulator for consideration, and published by both NERSA and the licensee on their websites. Page 18 of 21

Regulation of gas trading activity Question 47: When would a trading licence be required for the project? When the purchase and sale of gas as a commodity occurs by any person. Question 48: What if the IPP buys LNG directly from the source and import it to fuel its own power plant, would that be regarded as trading? No, the importation of LNG for own use would not be regarded as trading as defined in the Gas Act. Trading will be applicable when the LNG importer sells the LNG or regasified LNG to other parties. Question 49: If gas trading occurs, would NERSA regulate the gas price? Yes, sections 4(g) read together with section 21(1)(p) of the Gas Act empower NERSA to approve maximum prices for all classes of customers where there is inadequate competition in terms of the Competition Act. Prices refer to charges for gas (molecule plus trading margin). NERSA would not regulate the LNG import price, but would allow it as a pass-through cost to customers with the trading margin when trading occurs. Page 19 of 21

Question 50: What is the scope of the gas price mandate in terms of the Gas Act? NERSA regulates the maximum gas price anywhere along the gas value chain where the gas trading activity as defined in the Gas Act occurs. NERSA does NOT set gas prices, it only approves maximum prices. Distinction must be drawn between maximum and actual prices. Actual prices are negotiated between the licensed trader and individual customers within the maximum price approved by NERSA. Question 51: How does NERSA give effect to its mandate on gas prices in terms of the Gas Act? NERSA has developed a methodology for approving maximum prices for gas in South Africa. This methodology presents two approaches that NERSA uses to determine the maximum prices for gas, namely The Energy Price Indicators approach to determine the gas energy price by referencing the gas price to five energy indicators including coal, diesel, electricity, heavy fuel oil and liquefied petroleum gas. The Pass-through approach which caters for LNG imports and domestic gas production, amongst others. NERSA allows licensees to opt for the use of the pass-through approach to determine the gas energy price when licensee deems the price determined by the Energy Price Indicators approach to be materially lower or higher than its preferred and appropriate gas price in that it would impact its ability to compete and/or recover efficiently and prudently incurred costs and make a profit commensurate with risk. Page 20 of 21

Please send specific questions on this subject to pipedgas@nersa.org.za or contact the Piped Gas Division within NERSA for more discussions on specific issues regarding the regulation of maximum gas prices and tariffs. Page 21 of 21