The National Energy Regulator of South Africa (Nersa) has invited stakeholder comment on a proposed 10-year negotiated pricing agreement (NPA) between Eskom and the Hillside aluminium smelter, in KwaZulu-Natal, which is owned by South32 and is Eskom’s largest single customer.
The proposed NPA is likely to attract much public scrutiny in light of the fact that the previous tariff agreement between Eskom and Hillside had been the subject of years of intense public scrutiny and criticism, including one proposal that supply to the smelter be terminated as a way of addressing growth-sapping load-shedding.
The smelter’s discounted tariff and tariff methodology, which fluctuated in line with the performance of the aluminium price and the rand/dollar exchange rate, initially resulted in profits, but has become marginal for Eskom and was the subject of a long-running legal wrangle. This, after Eskom and BHP Billiton, the previous owner of the smelter, unsuccessfully opposed a Media24 Promotion of Access to Information Act application seeking access to parts of the contracts that governed supply of electricity to the smelter.
In the NPA submission currently before Nersa, Eskom argues in favour of a new discounted tariff, the precise rate of which has not been made public.
The utility says the new NPA will not only sustain Hillside’s commercial viability, but also enable the utility to retain yearly sales of some 10.3 TWh, as well as an ability to interrupt Hillside’s load to maintain grid stability and meet peak demand requirements.
The submission notes that Eskom’s key industrial customers yearly electricity purchases have dropped by about 16 TWh from 90 TWh in 2007 to the current level of 74 TWh.
It also asserts that the Hillside smelter will receive no direct subsidy under the NPA, as the proposed pricing arrangement covers Eskom’s cost to supply the smelter, which has a total demand of 1 205 MW across three potlines, and makes a contribution to fixed costs "ensuring other customers are better off".
The proposed tariff also represents an increase over current pricing levels, removes any remaining embedded derivatives, by excluding commodity price or US dollar linkages, is for a shorter duration than the previous NPA and includes a real yearly escalation linked to South African producer price inflation.
The NPA does, however, include a surcharge, which will be paid by Hillside when the aluminium commodity price and exchange rate is in its favour, but Eskom stresses that this will not result in an embedded derivative, as the base tariff is a rand-denominated tariff.
The submission to Nersa asserts that Hillside will not be viable or sustainable on the applicable Eskom standard tariff available, or its Megaflex tariff.
“In the absence of this proposed NPA, the Hillside smelter would close with resultant negative consequences”.
“The need for an incentivised energy pricing arrangement is the reality for aluminium smelters worldwide,” the submission adds, noting that electricity makes up 25% to 35% of operational costs in aluminium production.
The NPA, Eskom asserts, would also guarantee the retention of a major industry in South Africa and sustain some 1 800 direct jobs, as well as downstream employment in the aluminium value-chain.
Nersa has set a closing date for written comments of Wednesday May 26 and expects to announce the Energy Regulator’s decision on July 29.
The Hillside NPA deliberations are expected to be followed by other NPA submissions in line with an interim long- term framework for such agreements, which was approved by Mineral Resources and Energy Minister Gwede Mantashe in September last year.
“This is the first long-term NPA application that is going to be assessed and evaluated using the recently approved interim long-term framework,” Nersa says in a consultation paper, published in early May.