Nersa to address special pricing challenges with government

Energy regulator Nersa will address challenges that prevent the conclusion of more special pricing agreements between Eskom and large industrial customers with government.

This comes after nine applications for short-term agreements from intensive users have been turned down due to an inflexible policy framework drafted by the Department of Mineral Resources and Energy. 

A further application from South32 for a long-term agreement at its Hillside plant in Richards Bay was also rejected because the department has not yet finalised a policy framework against which Nersa can assess such agreements. Nersa stated that it can be considered at a later stage once the framework is available.

The agreements are aimed at assisting struggling intensive users to sustain jobs through discounted tariffs, while sustaining sales volumes for Eskom.

Minimum sales volumes are specified and discounts are limited to a certain minimum pricing level. The agreements also offer Eskom the right to interrupt electricity supply to such customers when it has supply constraints, according to agreed protocols.

The short-term agreements are limited to a term of two years.

Only two companies, Silicon Smelters and Sublime Technologies, have been successful in securing such short term contracts so far, but they were approved in terms of an interim framework.

Mixed results

Reports presented by Nersa officials at a meeting of its electricity subcommittee on Monday showed that the two agreements had mixed results.

Silicon Smelters had to close its smelter in Polokwane in July last year, little more than a year after the agreement was implemented, despite the discount on electricity tariffs. According to the report, this was due to changes in market conditions. It further failed to sign the special pricing agreement for its eMalahleni smelter, thereby “losing out on this opportunity”, the committee heard.

The Sublime Technologies agreement was however more successful, the officials reported.

According to Nomfundo Maseti, chair of Nersa’s electricity subcommittee, the method of calculating the discounted tariffs applied to Sublime and Silicon Smelters, however, differed from that in the final policy framework that is currently applicable, which is problematic. 

She said there further needs to be some flexibility in the framework.

Nersa will communicate these challenges to the department to ensure that they are not carried over to the long-term framework that is currently being drafted, she said.

According to Chabisi Motloung, chair of the Ferro Alloy Producers Association of SA (Fapa), the gap between what the industry can pay and what the framework offers is still too big.

He says the industry needs a discount to allow it to pay 65c per kilowatt hour (kWh). However, it costs Eskom more than 85c/kWh to generate electricity and the framework requires a minimum tariff of generation cost plus 15%

In the application itself, he adds, you need to say what price you can afford – the short-term framework guideline prescribes the Eskom price plus 15%, which is way too high.

Pricing not competitive

Even the 65c/kWh is still well above electricity prices in China, which is the industry’s main competitor, says Motloung.

At the Nersa public hearings last week concerning Eskom’s application for a further R27 billion in revenue, Chabisi said the SA Ferro Alloy Industry (Smelting), of which Silicon Smelters is a member, is facing extinction and can only be saved by regulatory government support.

He said the industry beneficiates South African ores for local consumption and export. These include manganese ore into ferro-manganese and silicon manganese, chrome ore into ferro-chrome and silica quartz ore into ferro-silicon and silicon metal.

South Africa owns over 70% of the world’s chrome and manganese ore reserves, but the local industry is in a crisis, he said. 

Electricity amounts to up to 50% of the cost of production and South African producers pay much higher prices that their international competitors. 

Chabisi said Fapa members consume electricity non-stop and can therefore increase demand in the time slots when consumption is low. 

If capacity that is currently standing idle can be activated, the electricity demand from the industry could increase from the current 2 414 megawatts (MW) to 4 075MW. This would lead to more than 2 000 additional job opportunities and R9.6 billion in extra sales revenue for Eskom, he said. 

Motloung proposed an immediate reduction of 14-15% in electricity tariffs to the ferroalloy industry, because: “If [the] industry closes down, this would anyway be lost, in addition to jobs, foreign revenue, taxes … ”

He asked for, among other things, long term negotiated pricing, because the “short-term pricing determination currently being used is not conducive to confidence in the industry”.