EIUG Supports Eskom Plan For New Pricing Deals With Power-Intensive Firms

The Energy Intensive User Group of Southern Africa (EIUG) believes there is policy, legislative and regulatory space to introduce new electricity pricing arrangements to help restart of idle mining and process-industry activities, as well as encourage new investments to absorb Eskom’s surplus, which it sees persisting for a number of years yet.

Amid flat demand and rising supply, the State-owned power utility claims to have up to 4 000 MW of surplus available on a daily basis and has indicated that the excess-supply situation will persist until at least 2021 – a marked departure from the recent past, when it resorted to rotational load-shedding to avoid a national blackout.

The EIUG is even more pessimistic about the demand outlook, telling Engineering News Online that the over-capacity position could endure until the late 2020s. “This becomes evident if one considers that the national demand has been flat for ten years now, with little prospect of significant growth over the short-term, while in excess of 10 000 MW of new Eskom capacity is being added to the system, in addition to the renewable-energy independent powerproducers (IPPs).”

The organisation is, therefore, supportive of Eskom’s initiative to promote mining and industry electricity sales and reports that its members are engaging with the utility to explore opportunities to reopen mothballed plant. “These sectors are major contributors to the South African economy. There is the potential to grow significantly and continue to be and become even more important as a catalyst for economic growth and job creation.”

Special pricing deals for large users remain controversial, though, having first come under close scrutiny during 2008 when South Africa first descended into load-shedding. The arrangements even led to a high-profile spat between BHP Billiton and Standard Bank, after a senior bank executive proposed shutting the aluminium smelters in KwaZulu-Nataland Mozambique owned at the time by the mining group. South32 currently owns the Hillside and Mozal smelters, which were developed largely on the basis of a metal-price-linked supply contract with Eskom.

However, EIUG says the previous special pricing arrangements facilitated projects that have made a significant positive contribution to regional and national economic and socioeconomic development. “The special pricing arrangements allowed Eskom’s excess capacity to be used up, directly benefitting all electricity customers who would otherwise have paid a higher price for electricity. This is also profit which Eskom would not have earned had the projects not been developed.”

The EIUG argues, too, that “robust policy” is already in place to enable such arrangements and describes the National Energy Regulator of South Africa as competent to properly regulate any new special pricing arrangements to ensure that they are in the public interest.

It refers specifically to government’s Electricity Pricing Policy, which has several sections that are accommodative of special deals. Section 2.7 provides for the “development and introduction of special products and prices to achieve specific goals”, while Section 5.4 of notes that, “Negotiated Pricing Agreements (NPAs) have served and could potentially serve as a valuable instrument to support projects that require price certainty over many years”. It adds, though, that NPAs should be limited and structured in a way to minimise deviations from standard prices.

The EIUG also highlights Section 15 (3) of the Electricity Regulation Act No 4 of 2006, which permits Nersa to deviate, in prescribed circumstances, from set or approved tariffs.

“Lower prices to large power users should reflect the lower cost of supplying such customers, and should not be seen as ‘discounts’. In fact, as Eskom has previously confirmed, large power users are actually subsidising all other customers,” it adds.

Eskom interim CEO Matshela Koko said that the utility is eager to discuss ways of increasing electricity intensive business activity and that workshops are being planned with the EIUG.

Koko says that, in the absence of growth and given the prospect of increased internal and IPP supply, Eskom will accelerate the decommissioning of five coal-fired powerstations, namely Camden, Grootvlei, Kriel, Hendrina and Komati.

“I believe there should be a total national focus on energy-intensive growth,” Koko avers, adding that Eskom is hoping to collaborate with public and private stakeholders in crafting a pricing framework that is acceptable to Nersa.

The regulator recently refrained from approving a two-year pricing agreement designed to enable Silicon Smelters to reopen two facilities, owing to the absence of a framework to support such an arrangement. “We plan to go back to Nersa with a package that has the support of government and motivates the benefits of the smelters to the economy.”

The EIUG says it is keen to work with Eskom on this package, but says the new pricing products should be structured to accommodate the special circumstances of each project or sector. “By their nature, such projects are generally capital intensive, requiring longer-term pricing arrangements to make them sustainable.”

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