The downward trajectory in Eskom’s sales to industrial customers over the past decade and a bit tells a tale of what happens when tariffs, which were too low for too long, are forced to correct too quickly. The State-owned utility’s industrial sales have dropped by about 16 TWh, from 90 TWh in 2007 to about 74 TWh currently, while electricity tariffs have increased by more than 500% over the period.
In a belated attempt to find a way of sustaining the competitiveness of power-reliant firms, Eskom initially mooted an industry tariff. The proposal was motivated partly to alleviate the stress on large customers, partly to sustain sales to customers that typically paid their bills and partly to extricate Eskom from previous, and unpopular, special pricing arrangements that had become unsustainable, notably the one extended to the Hillside aluminium smelter.
Besides the enormous 1 205 MW size of the KwaZulu-Natal smelter’s load, opponents are critical of both the tariff discount and its structure, the details of which were kept secret until 2013, when Media24’s Promotion of Access to Information Act application was eventually upheld by the courts.
The industry-tariff proposal has since evolved into an updated Negotiated Pricing Agreement (NPA) framework, approved by the Department of Mineral Resources and Energy last year. The framework allows Eskom and a qualifying customer to seek the approval of the regulator for a discounted tariff over a period of five to ten years.
The first NPA submitted to the regulator under this framework is a proposed ten-year deal between Eskom and South32’s Hillside smelter.
Eskom argues that the proposed NPA is superior to the previous 25-year special deal, as it is shorter, better priced and does not include the embedded-derivative risk associated with the previous deal’s linking of the tariff to the aluminium price and the rand:dollar exchange rate. In addition, it sustains a ‘strategic industry’ and Eskom’s biggest customer, whose account is up to date and whose load can be interrupted at times of grid stress.
The problem is that Hillside is far from being the only power- dependent South African enterprise in need of a better deal, with the ferrochrome sector having been particularly vocal about its growing lack of competitiveness. In theory, NPAs should be open to any industrial or mining company that has a minimum yearly consumption of 80 GWh and/or a load factor greater than 70%. In reality, however, Eskom is in no financial state to extend similar NPAs to many others.
In other words, NPAs are looking less and less like a sustainable remedy and South Africa should, thus, be moving with urgency to implement a broader and less discriminatory solution.
Part of the answer surely lies in liberating distributed- generation investments through a genuine reform to the Electricity Regulation Act that will allow energy-intensive firms to invest, wheel and trade power in a way that brings much-needed energy, price-path certainty and the benefits of economies of scale.