Sir

I was very disturbed to read the article State Calls for 'Urgent' 10% Electricity Cutback by Mariam Isa and Charlotte Mathews published in Business Day on 30 January 2008.

While power rationing in the short- to medium term has become inevitable as a direct consequence of Eskom and government's horrendous negligence in properly managing the country's power requirements, there are other medium term and long term factors that should be of dire concern to the country.

Eskom CE Jacob Maroga blithely calls for electricity tariff increases of 20% in each of the next five years to help cover the cost of expanding Eskom's generation capability in order to solve the current power shortfall. Unless there is a radical relook at some of Eskom's current commitments, this shortfall is going to be severely aggravated in the next 2 to 5 years.

At present non-industrial Eskom customers pay about 25 to 30 cents/kWh for their power. With 20% increases over 5 years this price will rise some 149% to 62 to 75 cents/kWh. This is not only going to place severe pressure on individual consumers, whether they be domestic or commercial,  but will have a very negative effect on the entire economy and its growth.

All this is proposed by Eskom while it is supplying, at a radically discounted rate, bulk electrical power to the biggest power consumer in the region: Billiton's three aluminium smelters at Richard's Bay and Maputo. Together these smelters consume some 2 700 MW. A shortfall of this amount causes an Eskom Brown Phase 2 loadshed which results in a national power outage of more than 12 hours per week.

While Eskom is extremely coy about disclosing its power tariff to Billiton, it is believed to be about 7 cents/kWh, compared with 25 cents/kWh for Eskom business consumers, and 30 cents/kWh for Eskom residential consumers.

This also needs to be seen in the perspective of Eskom's production cost for power. A simple inspection of Eskom's 2007 report shows that it had total annual costs of R33 billion while selling 220 GWh of power which means an average cost of 15 cents/kWh.

But things get worse - a lot worse.

As part of the government's national industrial participation programme linked to the Arms Deal, the country finds itself the recipient of another aluminium smelter, this time Alcan's 720 ktonne/year, greenfield facility at Coega. This 1 300 MW power user is planned to come onstream in 2010. Eskom has also given Alcan a secret 25 year special deal on discounted power tariffs. These are also linked to the price of aluminium on the London Metals Exchange and so a risk-free profit for Alcan is guaranteed.

It is just like being given the right to printing money, but for the benefit of foreigners, while using South Africans' electricity expenditure as input. The guaranteed long term supply of the primary input factor of aluminium production, being electrical power, and this being linked to output price transfer the business risk from multinational corporate to the unwitting individual consumer.

Additionally, increasing the current aluminium smelting load from 2 700 MW to 4 000 MW would place even greater pressure on the system. A shortfall of this magnitude would take the loadshed from Stage 2 to Stage 3 and within a whisker of the catastrophic 4 500 MW shortfall required to cause complete network failure.

Eskom's next new coal-fired power station Medupi comes on line in 2013. The current build cost is R80 billion and it will produce 4 788 MW of power, compared with the aluminium smelter requirements of 4 000 MW.

Over the 25 year duration of the power supply agreement (which is close to the 30 years of the typical lifespan of a power station), Billiton and Alcan will pay about R50 billion to Eskom for their power. So if Eskom's gross profit is about half of its income, i.e. R25 billion, the aluminium smelters will only pay for 30% of the current build cost of the new power station, yet use 85% of its output. This means that normal Eskom consumers will be in effect paying for the build cost of this new power station.

It is a frightening reality is that Billiton's and Alcan's four aluminium smelters require almost one entire power station the size of Medupi to power them.

So this is the crunch: just how is Eskom going to fund its required expansion with these kinds of economics?

The answer is that Eskom's other customers are going to pay for both Eskom's expansion and to subsidise Billiton's and Alcan's smelter operations.

To add insult to injury the aluminium raw material, bauxite, is not even mined in South Africa, it is mined in Billiton's own mines in Western Australia.

One also has to ask how is it possible for the government to allow Alcan's Coega aluminium smelter with a power requirement of 1 300 MW to come on stream in 2010 when there is a current shortfall of 3 000 MW and the next new baseload power station only comes on stream in 2013? The agreement with Alcan was signed just last year by which time it was very well known by both Eskom and Government that there would be critical power shortfalls from 2007 until at least 2013.

Review and analysis of actual facts show that the Ministers of Mineral and Energy Affairs and Public Enterprises are talking plain manure when they say that the country is a victim of its own success in respect of electrification and economic growth. The current power crises is caused purely due to power station outages resulting from the usage of poor quality coal as well as poor maintenance. Both of these result from Eskom's policies on affirmative procurement and transformation - derivations of Government's race-based predispositions on macro-economics.

What is a reality is that South Africa is a victim of negligence and recklessness of breath-taking proportions by the new management of Eskom, the responsible ministers and indeed the entire Cabinet.

Power shortages in the medium term are going to be even more severe than those currently due to Eskom's and Government's negligent planning as well as their commitments to plainly unfeasible power-guzzling projects such as Alcan's Coega aluminium smelter.

I have no doubt that Eskom is presently quite happy to allow the current loadshedding to scare South African electricity consumers into paying whatever it takes to finance the doubling of Eskom's generation capability, including building as many as ten nuclear power stations - with all the consequences that these have. The fear factor is a powerful arm twister.

It is clear that a full independent forensic investigation needs to be performed on Eskom's current state of finances as well as its future obligations and liabilities. Eskom needs to be open and transparent to all of its stakeholders about its tariffs and commitments in respect of all of its customers and operations.

With acknowledgements to Richard Young and Business Day.