The big Billiton rip-off

2013-03-22 00:00

JOHANNESBURG — Eskom sells nine percent of its electricity to BHP Billiton’s two aluminium smelters at less than one-fifth of the tariffs paid by other electricity consumers.

The preferential tariffs for the two smelters, Hillside in Richards Bay and Mozal in Maputo, show how the two loss-making smelters are kept going with the high electricity prices that the rest of the country’s consumers — household and industrial users — pay for electricity.

Details of the deal emerged from contracts Eskom has shown to Media24 in terms of a court order ratified by the Supreme Court of Appeal last week.

Billiton appealed against the original court order, but the appeal court turned it down.

At Hillside, Billiton pays for two-thirds of the 1 200 megawatts the smelter uses in accordance with a highly secret formula agreed as far back as 1992 and which applies until 2028.

Hillside is paying 22,65 cents per kilowatt hour to Eskom this month, while households are paying an average of R1,40 per kilowatt hour.

This is far below Eskom’s supply cost.

It costs Eskom on average 41 cents per kilowatt hour to supply electricity.

The price was calculated for sister newspaper Beeld by Johan Anderssen, a consulting electrical engineer in Cape Town who has been researching the effect of the two aluminium smelters on Eskom’s finances for several years.

Until yesterday, this formula was one of Eskom’s best-kept secrets. It is based entirely on the aluminium price and the exchange rate of the rand against the dollar. No provision is made for price increases.

It was signed by Alan Morgan, the then executive director of Eskom, who became the parastatal’s CEO in 1996.

A second contract for Hillside was concluded in 2001 because Billiton wanted to enlarge the factory by one-third so that it could smelt 750 000 tons of aluminium per year in Richards Bay.

This time Eskom insisted on a small price increase mechanism.

Even with this increase mechanism the electricity price for the extension section of Hillside is between 12,88 and 32 cents per kilowatt hour today.

According to the contract, this tariff was approved by national energy regulator Nersa on condition that other consumers should not be disadvantaged by it.

Eskom has been trying since 2009 to renegotiate the contracts for Hillside, but Billiton refuses to agree.

Eskom applied to Nersa late last year to review these contracts, but the review was delayed pending the court case brought against Eskom and Billiton by Media24 regarding the publication of the contracts.

A similar formula initially applied in Mozal’s case, but it was adjusted three years ago. A standard tariff of 22,8 cents per kilowatt hour paid to Eskom now applies there. However, payments are also made to the Mozambican electricity authority, Motraco.

Mike Schüssler, chief economist with Economists.com, said his group’s research shows that households in South Africa pay on average about R1,40 per kilowatt hour for electricity.

But it varies greatly — it is R1,68 plus VAT in Johannesburg and R1,39 in Durban.

These tariffs are simply not sustainable.

Schüssler said Billiton used so much electricity that it reduced the average tariff paid by industry.

“Industries buying directly from Eskom pay an average of 48,87 cents per kilowatt hour when the two aluminium smelters are included.

“Mines, which also buy directly from Eskom and pay the same tariffs as industrial users, pay an average of 58 cents per kilowatt hour,” he said.

ES x 6,54 x AL x R/$ = Rand

This is the secret formula agreed in 1992 that determines the electricity price at which Billiton still buys dirt-cheap electricity for its Hillside smelter in Richards Bay today.

In the formula:

ES: the total number of gigawatt hours consumed in a particular year

AL: the price of aluminium on the London Metal Exchange

R/$: the exchange rate of the rand against the U.S. dollar

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