There was no imaginable way for Eskom to escape from its onerous contract to supply BHP Billiton’s Hillside smelter and ease the knock-on effect on the ordinary consumer, the National Energy Regulator of South Africa said in response to questions from MPs on Tuesday.
Nersa’s head of electricity regulation, Thembani Bukula, told Parliament’s portfolio committee on energy the deal rested on two pillars — Eskom having excess capacity and the buyer constituting an exception — and both were still in place.
“It is clear Nersa can’t revoke a contract that two parties entered into. There is an irrevocability of the contract that needs to be taken into account, even if it is not in the public interest,” he said.
“But what we have to accept though is that those contracts were negotiated at the time where we had excess capacity and they were based on the fact that they would be consuming large amounts.”
Bukula added: “So the distinguishable features … still exist. BHP Billiton is still by far the largest consumer of electricity and we still have excess capacity. We still have 43 000 MW of installed capacity and 30 000 MW peak demand. So those two conditions still exist, so to revoke that contract is not going to a walk in the park.”
BHP Billiton’s tendency to drag any dealings with Eskom out into a legal process, added to the difficulty.
“As far as the complaint Eskom had laid with Nersa around the pricing of that and whether it is still in the public interest, that is still in process and it is going to be a long legal process, as BHP Billiton would want it,” he said.
“Every time you apply to publish a clause in their confidential agreement, BHP Billiton take you to court or takes you through the legal process and it has taken us close to two years to get to the point of whether we can publish certain parts of the contract that really deals with the price and how it was structured.
“And we are still working on it and going on with it.”
He also cautioned that paying BHP Billiton contractual penalties not to consume electricity would prove more onerous still, and recalled that Billiton had, around 2003 when aluminium prices were high, sought to get out of the contract but was held to it by Eskom.
Bukula was responding to questions from Democratic Alliance MPs Gordan Mackay and Pieter van Dalen as to whether Nersa could intervene and spare Eskom losses under the contract, that the cash-strapped electricty supplier passed on to the customer by demanding higher tariff increases.
The contract was signed in 1992 and was seen at the time as a spur for industrial development but has become a millstone for Eskom since. The electricity supplied to BHP Billiton’s smelters was not based on production costs but instead tied to the rand-dollar exchange rate and the price of aluminium in US dollars per tonne.
The opposition has been slamming Eskom over the deal for years, while its expiry date has been contested between the parties. It was meant to come to an end in 2020 but BHP Billiton has argued that a supplementary agreement inked in 2001 has put it back to 2028.
Nersa has approved a 9.4% increase from April 1 to March 30 next year and the committee was being briefed on the calculations that brought the regulator to this determination.
Bukula said Nersa expected Eskom to lodge another application within the next three months for tariff structures for the medium term. Asked whether he foresaw that this time tariff hikes would exceed the 10-percent mark, Bukula said this was unlikely.
He told ANA since Eskom was nearing completion of overdue construction on its Medupi and Kusile coal plants it would therefore “also be able to take other pain” in the form of lower increases.
When asked by MPs how Nersa was factoring the planned future addition of increased nuclear capacity to the grid into its tariff projections, Bukula said this was not in the regulator’s sums at the moment.
He said from the moment a decision was made on new nuclear plants it would take another 15 years for these to start supplying electricity. Given that there was no decision as yet, Nersa had not started making any calculations.