South Africa: National Energy Regulator braces to evaluate new discounted power pricing deal for Hillside Aluminium smelter

South Africa’s National Energy Regular, NERSA has invited stakeholder remarks on a proposed 10-year negotiated pricing agreement (NPA) between Eskom, the South African electricity public utility and Hillside Aluminium smelter, in KwaZulu-Natal, owned by South32 and is the largest single customer of Eskom.

The proposed NPA is anticipated to allure much public scrutiny considering the fact that the former tariff agreement between Eskom and Hillside had been the subject of years of enormous public scrutiny and criticism, comprising one proposal that power supply to the aluminium smelter needs to be ceased to control the rise in load shedding.

The discounted tariff and tariff methodology of Hillside Aluminium smelter which swung in line with the performance of the aluminium price and the rand/dollar exchange rate, in the first instance, resulted in profits, but on the flip, it became marginal for Eskom and gradually became the subject of a long-running legal dispute. This, after Eskom and BHP Billiton, the former 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.

Eskom insists in favour of a new discounted tariff, while the precise rate of which has not been made public in the NPA submission currently before Nersa.

Eskom said: “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 also highlights that Eskom’s key industrial customers yearly electricity purchases have contracted by about 16 TWh from 90 TWh in 2007 to the current level of 74 TWh.

It also states that the Hillside aluminium smelter will not receive any direct subsidy under the NPA, as the proposed pricing arrangement covers Eskom’s cost to supply the smelter, which has a total demand of 1205 MW across three potlines, and contributes to fixed costs "ensuring other customers are better off".

The proposed tariff also incorporates a rise over current pricing levels, eliminates 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, comprise a surcharge, which will be paid by Hillside smelter when the aluminium commodity price and the exchange rate is in its favour, but Eskom stresses that this will not result in an embedded derivative, as the base tariff is rand-denominated.

The submission to Nersa contends 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 submission adds, noting that electricity makes up 25% to 35% of operational costs in aluminium production: “The need for an incentivised energy pricing arrangement is the reality for aluminium smelters worldwide.”

The NPA, Eskom asserts, would also guarantee the retention of a major industry in South Africa and sustain some 1800 direct jobs, as well as downstream employment in the aluminium value chain.

On 26^th May 2021, Nersa has set a closing date for written comments and expects to announce the Energy Regulator’s decision on 29^th July.