Distressed companies can apply for lower electricity tariffs

The door is once again open for distressed industries to negotiate lower electricity tariffs with their respective suppliers, be it Eskom or their local municipalities.

This follows the Department of Energy’s finalisation of the framework for short-term negotiated pricing agreements to save jobs and maintain Eskom’s sales volumes.

The department has also issued an interim framework for long-term negotiated pricing agreements to assist existing industries. According to this document the final framework will further provide for incentives to encourage new investments in South Africa’s industrial sector.

Moneyweb reported in March that energy regulator Nersa had approved two-year incentive pricing agreements for Silicon Smelters and Sublime Technologies.

This enabled Silicon Smelters to reopen its furnaces in Polokwane and eMalahleni, but it eventually closed a few months before the agreement came to an end.

The Sublime agreement ended in September.

Although Nersa received similar applications from other companies, it stopped processing them while awaiting policy guidance from the department.

With the finalisation of the framework, these applications can now be processed.

The framework limits the timeframe for the Nersa process to 120 days.

According to the new frameworks, the short-term agreements will apply for three years with an option to extend for another two. They are available for companies that have been forced to close plants or where closure is imminent.

Prerequisites

Nersa will analyse company information to ensure that electricity is a significant cost driver and among the top three cost items. The applicants’ electricity bills must be paid up and they will be disqualified if they have been in trouble with competition authorities.

Their applications must be supported by the Department of Trade, Industry and Competition and they will agree to the Eskom system operator interrupting their power supply at short notice under certain conditions.

On the upside of commodity prices, Eskom will share in the benefit.

The interim long-term framework provides for agreements of up to 10 years.

Eskom’s decades-old negotiated pricing agreement with South32 for its aluminium smelter in Richards Bay has been the target of much criticism. The tariff Eskom charged the company was linked to the aluminium price and at times it was heavily subsidised by consumers.

This agreement ended recently, but South32 chief operating officer Mike Fraser told Engineering News that it has reached a new agreement with Eskom on the same basis as its agreement with Mozal Aluminium and not linked to the commodity price.

It still requires Nersa approval.

Eskom has confirmed that it will now adjust the agreement in line with the new framework before submitting it to Nersa.

The interim framework for long-term agreements provides that companies will be disqualified if they or their main shareholder have been found guilty of corruption in the previous three years.

Even an investigation in this regard can result in disqualification and the company will have to refund any benefits it has enjoyed to date.

Process

Companies must submit their applications to their electricity suppliers, who will submit them to Nersa. Should a municipal supplier fail to do the submission, the client can approach Nersa directly.

Nellis Bester, chair of the Ferro Alloys Producers Association (Fapa), says there are still more questions than answers about the new regime. Fapa has met Mineral Resources and Energy Minister Gwede Mantashe about the matter and is waiting for feedback from his department.

According to Bester, Fapa expects the frameworks to deliver cost savings of a mere 5-10%, which is not enough for industry to survive.

He says 30% of Fapa members’ production capacity is currently standing idle due to high cost and low market demand.

Bester says South African industry currently pays $75 per megawatt-hour (MWh) as opposed to the $40 of international competitors. In Europe, where governments subsidise their local industries, it can be as low as $20.

Read: Refinancing of renewable IPPs won’t temper electricity tariffs

He calls for the scrapping of subsidies for residential customers included in Eskom’s industrial tariffs, which he says can be as much as 14% of current tariffs.

Bester adds that should Eskom get the tariff increases it is owed according to recent court judgments, it would be the end for local industry.

Moneyweb earlier reported that Nersa is appealing a judgment that set aside Nersa’s tariff determination for the current three-year period and ordered a tariff increase of 15% next year.

The order has been suspended pending the appeal. This is only one of several judgments favouring Eskom.