While Eskom deals with the impact of its aluminium smelter contracts, grapples with sourcing affordable coal for its power stations and tries to secure funding for a build programme, government is still selling South Africa’s electricity cheaply.
The Rio Tinto Alcan (RTA) aluminium smelter, destined for the Coega industrial development zone in the Eastern Cape, is temporarily on hold because of the power crunch, but when it comes on line it will do so with cheap power.
The contract between Eskom and RTA for the supply of power to the 1300MW smelter has been signed, and is still in place, under the auspices of the developmental electricity pricing programme (Depp), housed in the department of trade and industry.
The pricing programme was designed to attract energy-hungry investors to South Africa, once deemed a land of excess power capacity, by offering cost-efficient rates for power. How much cheaper the rate will be is unclear.
Eskom told the Mail & Guardian that the price for RTA ”is linked to Eskom’s Megaflex tariff and in deriving the unit price Eskom applied the pricing principles specified in the Depp guidelines”.
The agreement, Eskom said, was ”approved by Nersa [the National Energy Regulator of South Africa] based on the Depp guidelines, which were published by the department of trade and industry as approved by Cabinet”.
Although the pricing programme policy may have been wise when South Africa was electricity-flush, its purpose has become less clear given present energy constraints. At least one official believes government now needs to rethink this type of macro-economic policy.
If the deal, or others like it, went ahead in its existing form it would be ”very embarrassing”, said the source.
Deals with aluminium smelters such as BHP Billiton’s Hillside smelter have contributed to a R9,5-billion loss for Eskom. Although these are ”unrealised losses”, according to Eskom, the damage to the company’s financial state has been profound.
The RTA smelter, while on ice, will go ahead — depending on Eskom’s ability to provide new baseload capacity — when its new stations, Medupi and Kusile, come on line, according to Guy Larin, Africa vice-president at RTA.
”RTA has committed considerable resources, including more than $130-million to the Coega Aluminium Smelter project, prior to demobilisation of its staff during the first half of 2008, at the peak of the power and load-shedding problems in South Africa,†he said in a statement to the M&G.
In the meantime, the company continues to invest in local communities in Port Elizabeth through ”regional industrial development and corporate social responsibility programmes at considerable cost”.
Â
”RTA has since 2008 been engaged in discussions with the government of South Africa and Eskom on the project,” he said. RTA is awaiting an updated timetable on when power will be available.
”But [we] expect that this will continue to be linked to the timing of the completion of the second unit of the Medupi power station and Kusile projects. The smelter will need about 1350MW of power. Medupi, when it comes fully on line, in about 2016, will produce 4000MW.
Larin said the smelter construction would take about 27 months from the time RTA proceeded with the project. The company would go ahead with it only once it was ”satisfied [with] the viability of the project and that sufficient power will be available on completion of the construction”. The smelter will be an estimated R18-billion investment, according to the Coega Development Corporation (CDC). But observers are critical of the Depp.
”We cannot continue to sell energy at below cost to large industry if we are interested in our economic development,” said Richard Worthington, the climate change programme manager for the Worldwide Fund for Nature (WWF). ”In addition, the Depp is not consistent with Cabinet’s position on climate change. We need to reconcile the policy with the stance on climate change.”
The WWF recognised that the issue of electricity pricing has been problematic in the past, he said. As such, South Africa needs an escalating tariff that protects the poor from tariff increases that begin to reflect the cost of producing electricity.
Groups such as Earthlife Africa have slammed Eskom’s lack of transparency and have questioned the Depp. It protects deals with a confidentiality clause, ensuring that the terms of such contracts remain opaque.
The department has given no indication that the Depp is to be shelved or revised in the light of South Africa’s electricity shortages.
According to the official, the economy cannot grow, given the power outlook. The base-load power that is being added to the grid through Medupi and Kusile will be soaked up by projects such as RTA’s smelter.
The department said that discussions between government, RTA and Eskom were continuing. It added: ”The power demand of the project has always been incorporated in Eskom’s long-term demand and supply planning … In terms of the broader tariff framework as determined by Nersa, all electricity contracts must be cost-reflective.”
At the height of the power crisis last year the department assured the M&G that the price under the Depp ”is a full cost-reflective price and rises as our cost of producing electricity rises”.
