Saldanha Steel aims to sign offtake deal with gas-fired IPP in early 2014

22nd November 2013

By: Terence Creamer

Creamer Media Editor

  

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Steel producer ArcelorMittal South Africa is hoping to conclude a power purchase agreement (PPA) early next year with an independent power producer  (IPP), which is proposing the development of a 800 MW power station on the Saldanha Steel mill site, in the Western Cape.

The gas-fired project is part of a portfolio of initiatives being undertaken by the steel plant to improve supply security and mitigate rising electricity prices. It is also designed to recalibrate the 1.2-million-ton-a-year facility – built in the late 1990s in part to take advantage of South Africa’s then low-cost electricity and the plant’s access to cheap iron-ore – to the new realities of rising power costs and higher iron-ore prices.

Business improvement manager Reinet van Zyl, who has championed several energy efficiency projects at the plant that are currently receiving recognition both within and outside of the global group, reports that the facility is hoping to align the IPP project with a major upcoming mill shutdown. However, she is concerned that the schedule could be threatened by a number of regulatory hurdles and uncertainties.

From an engineering perspective, the project, which would initially be developed as an open-cycle gas turbine fuelled through compressed natural gas sourced from Angola and delivered by ship to Saldanha Bay, can be developed within 18 months. But besides the approvals the IPP will require from South Africa's energy and port regulators, there is also uncertainty about whether power can be sold to other private offtakers, or whether Eskom will be prepared to conclude a PPA for the balance of the capacity.

GM Richard Holcroft indicates that Saldanha Steel would ideally like to time the construction and commissioning of the power plant to coincide with the major relines scheduled for the plant’s Corex and Midrex furnaces, which are scheduled for 2016.

The electricity received is unlikely to be cheaper than that available from Eskom, but the tariffs are unlikely to increase at the same pace as outlined under the third multiyear price determination (MYDP3).

Industrial consumers face yearly increases of around 9% between 2013 and 2018, but prices could rise faster should Eskom move to reopen the tariff determination, having noted that savings alone are unlikely to enable it to close a R225-billion financial gap that will arise over the determination period. The gap, the utility says, is the consequence of the difference between the 16%-a-year increases requested by Eskom and the average 8% sanctioned by the National Energy Regulator of South Africa.

The utility is currently undertaking a review aimed at dealing with the shortfall, while implementing a R30-billion cost-savings plan to which it had committed in its MYPD3 application. It has already indicated that it plans to use the regulatory clearing account (RCA) to “claw back” some of the revenue disallowed through the determination – the RCA is a risk management device used to reconcile differences between actual and approved revenue during the MYPD3 period.

Van Zyl says it is premature to identify the members of the IPP consortium, save to say that it included companies that have developed private power capacity in a number of other African counties.

In the meantime, the focus at the Saldanha Steel mill is on sustaining the efficiency gains that had been made since 2010, through 15 separate projects and programmes. These have lowered electricity use for a ton of steel produced from 1 514 kWh in 2009 to 1 190 kWh in 2012. They have also reduced the plant’s overall energy consumption, including that arising from the use of liquefied petroleum gas (LPG), coal and coke, to 23.7 GJ/t from 27.1 GJ/t in 2009.

The savings have been achieved through projects involving relatively modest levels of capital expenditure; with R21-million having been spent on the initiatives in 2011 and 2012.  The interventions range from the introduction of new technology, such as variable speed drives and efficient lighting, through to operational innovations that have resulted in changing the mix of gases used in the processes, which, in turn, has lowered the overall use of LPG in the steelmaking process.

Van Zyl is optimistic that the reductions, which have contributed to positioning the mill as the second-lowest-cost producer in the bigger ArcelorMittal group and within the steel industry’s lowest cost quartile, will be sustained. However, changes to the iron-ore quality that the plant will be receiving from Kumba are likely to place some of the savings at risk, as the lower quality ore will require additional energy for conversion.

Ultimately, though, Saldanha Steel would like to reduce its dependence on Eskom, which instituted emergency procedures in late November compelling large consumers to cut consumption by 10% in light of a supply/demand tightening, and bolster supply stability on the West Coast through the IPP project. But Van Zyl says this ambition will only be realised if the necessary legislative and regulatory support is given to private developers hoping to pursue baseload power projects in South Africa.

Edited by Creamer Media Reporter

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