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,
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,
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
"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
"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.