JOHANNESBURG Details of the electricity supply contracts between BHP Billiton Plc and South Africas power utility Eskom Holdings SOC Ltd. that emerged March 22 imply a subsidy of about 3 billion rand ($323 million) per year towards BHPs electricity prices.
The National Energy Regulator of South Africa (Nersa) said it will conduct hearings in April to investigate the terms of the contract and the implications for other power users.
Last week, a court denied an appeal from the diversified miner to keep the terms of the controversial electricity contracts secret (amm.com, March 19).
Details of the pricing formula used to determine the Hillside and Bayside smelters electricity tariffs emerged after Eskom revealed the contracts to Media24, the newspaper that started the legal action to make the contracts public.
Media24 reported on March 22 that limited details of the contract indicated that Eskom provided BHP with electricity at 22 South African cents (2 cents) per kilowatt-hour (kWh), compared with about 57 South African cents (6 cents) per kWh for other industrial users and as much as R1.40 per kWh (15 cents) for general consumers.
Eskoms average operating cost comes to about 47 cents (5 cents) per KWh, indicating that other South African electricity consumers have been subsidizing BHPs power up to a value of 3 billion rand, Media24 reported.
BHP pointed out that the real price for the electricity, which is linked to commodity prices and currency fluctuations, would only be truly known once the contracts had run to their full terms.
"It is important to note that Eskom confirmed in the court papers that our aluminum business has always paid more for electricity than the cost of generation and, for many years, has paid well above the market rate for power," BHP noted in its response to the price calculations by Media24.
"We think it is important for the public to recognize that the construction or refurbishment of the Bayside and Hillside smelters at a cost of more than R60 billion ($6.5 million) followed strategic decisions by successive South African governments between 1970 and 2003 to encourage large-scale industrial projects by making surplus electricity capacity available at internationally competitive rates," BHP said.
As for Nersas investigation of the contracts next month, Stephen Meintjes, head of research at Imara SP Reid, questioned whether the regulator has jurisdiction to have a say over the contracts.
"Can Nersa overturn a contract? I dont know, but I dont think so," he said.
However, the contracts contain two flaws, according to Meintjes: No price increases were built into the contracts and the term of the contract was set over multiple decades, without any contractual flexibility should circumstances change.
"The problem was to extend the contracts deep into the 2020s somewhere, but that was the reality then," Meintjes said.
"In hindsight, it was foolish not to build in more flexibility, but at the end of the day, a contract is a contract, and if Eskom were to try to get out of this, BHP would, firstly, sue the hell out of Eskom, and then BHP would shut its aluminum operations," Meintjes added.
A version of this article was first published by AMM sister publication Metal Bulletin.