We all know that the aluminium smelters use vast amounts of electricity , which they get at a subsidised price, but just how much sugar is there in this sweetheart deal?
The Democratic Alliance’s Pieter van Dalen, who created a stir last week when he pitched a thick Eskom document labelled ‘Secret/Geheim” at Parliament, said that the smelters paid as little as 12c a kilowatt hour last year and the rest of Eskom’s customers paid 31c. This is essentially the wholesale price.
The retail price in the case of Johannesburg consumers, for instance, was about 50c last year. Electricity prices for the most part are transparent — they are determined by the National Energy Regulator (Nersa). But in the case of the smelters this is not the case.
The prices are confidential and determined by formulae which can only be described as arcane — they are influenced by United States inflation (as measured by producer prices), domestic inflation, US and South African interest rates, the aluminium price as set in London and currency fluctuations between the rand and major currencies.
Eskom is said by one industry source to have taken derivative positions with at least one local bank. Asked to respond, Eskom said: ‘Contracts are directly with BHP Billiton and Anglo; any hedging we do on the aluminium price or exchange rate is with financial institutions, which we cannot disclose.”
Losses on so-called embedded derivatives helped Eskom post a R9-billion loss when it last reported its financials.
The Mail & Guardian understands that the 12c a kilowatt hour applies to the Mozal contracts, the BHP Billiton smelter near Maputo. Smelters operated by BHP Billiton and Anglom pay 20c a kilowatt hour or more.
Eskom said in response to questions from the M&G that at the end of 2009 it had a R7.1-billion liability on its derivative contracts and aimed to eliminate the liability fully by negotiation. It said that very good progress had been made in extracting Eskom from the embedded derivatives, ‘particularly with the Mozal contract, which is the biggest contributor to the liability”.
The internal Eskom document referred to by Van Dalen confirms this. It shows the value of the contracts with Hillside Potline 3, Billiton, Motraco and Skorpion. With the exception of Skorpion in Namibia, which is Anglo-owned, these smelters are all operated by BHP Billiton.
The net loss at the end of June 2009 is shown as R7.1-billion, the biggest single loss by far being Motraco, at R3.9-billion. The other losses are Billiton (R2.4-billion), Hillside Potline 3 (R511-million) and Skorpion (R213-million).
Eskom says that in the 1990s it had spare capacity and it made sense to find an avenue to sell that capacity to recover fixed costs. ‘These contracts only started being out of the money during [financial year 2009] when our tariffs were increasing and the aluminium price sank; the Mozal contract, in particular, was an important inter-governmental regional development.”
One observer says that Mozal got the sweetest of deals to encourage BHP Billiton to set up the smelter in Mozambique to facilitate regional development.
Critics say this type of regional assistance should to be reflected in Mozambique to facilitate regional development. Critics say this type of regional assistance should to be reflected in the annual budget rather than nontransparently in the electricity price.
The department of public enterprises, Eskom’s shareholder, says that most of the smelter arrangements were concluded before the 1994 democratic elections.
‘Eskom had excess capacity and the cost of electricity supply was much lower. These are not ‘secret deals’.” The department says that Eskom has already secured a commitment from BHP Billiton to renegotiate the special pricing agreements.
‘Discussions with BHP Billiton to introduce a new pricing path which will not be linked to commodity pricing and foreign currency are therefore progressing. ‘We remain confident that such commitment will soon be secured from Anglo American.
‘The government’s forward looking intent is to regularise and improve transparency in respect of special pricing arrangements.” The scale of the smelters is shown in another table in the internal Eskom document. BHP Billiton’s Hillside and Bayside smelters are Eskom’s second-largest customer after Johannesburg’s City Power.
Hillside and Bayside used 2 960 gigawatts compared with City Power’s 3 319 gigawatts. BHP Billiton’s Mozal plant is in fifth place at 1 959 gigawatts. If the usage of these smelters is combined, BHP Billiton is Eskom’s biggest customer by far, at 4 919 gigawatts.
Van Dalen told the portfolio committee on public enterprises that BHP Billiton and Anglo were using about 15% of the country’s electricity and that Motraco/Mozal was making a fat profit without contributing to the country’s GDP. His advice was reportedly to ‘cut off” Motraco to keep the lights on.
From Eskom to an independent operator
Eskom comes in for criticism in an internal government ‘concept paper” designed to facilitate the establishment of an independent system and market operator.
The operator is intended to break Eskom’s stranglehold on the South African electricity market by setting up a mechanism for independent
power producers to sell their electricity to the grid independent of Eskom.
The concept paper, which is being prepared for the interministerial committee on energy, says that many players in the South African market believe that an independent buyer would be more supportive of independent power producers and co-generators than Eskom.
‘Independent developers and industrial customers stated that they had difficulty obtaining feasible purchasing power agreements from Eskom. ‘This is attributed to Eskom’s risk aversion or to a desire to restrict competition in generation.”
The paper says that an independent buyer would be able to impose cost-reflective pricing on existing power plants and new producers in return for market access and the certainty of long-term agreements.
‘There is a need to change the current business model, funding model and the market operator to attract investors,” the paper says, emphasising that this is necessary to resolve the energy crisis. It says that lessons learned from international experience are that diversification of generating supplies is not always in the interests of a monopoly supplier and that the buyer has to be truly independent.
‘Private investors will be reluctant to build new generation or distribution facilities or buy existing ones if they do not believe that the system and market operator will be truly independent. The transmission network must also be independent from the participants.”
The report says that because Eskom controls generation, transmission and distribution it might be hiding inefficiencies across all three operations.
‘Cross subsidies within the Eskom structure are not transparent, hence some municipalities are concerned that they might be subsidising Eskom’s customers.” It says that the structure does not promote the efficient generation and distribution of electricity.
‘To ensure efficient generation and distribution of electricity, the transmission business must be removed from Eskom.”
The report says that this does not amount to privatisation: ‘It is important to note that removing transmission from Eskom does not mean privatisation but open access to independent power procedures.”