Publication: Carte Blanche Issued: Date: 2008-04-06 Reporter:

Where'd the Cheap Coal Go?

TV Station  MNet


Carte Blanche

Date 2008-04-06
Producer Susan Purén
Presenter Devi Sankaree Govender
Web Link




"That means someone is subsidising big industry's electricity. Guess who? You and I."

In January this year Carte Blanche exposed that many of Eskom's power stations had run out of coal stock and that the country's power shortage was as a result of an undersupply by Eskom, rather than an over-demand by its clients.

We highlighted the fact that a lack of skills - due to Eskom's ruthless Affirmative Action policies - resulted in unplanned breakdowns and capacity loss.

We also reported that Eskom was still exporting electricity to neighbouring countries while load shedding was in full swing back home.

We showed that despite this complete lack of performance, Eskom's top brass have paid themselves millions of rands in bonuses over the past few years.

Since the broadcast Eskom has declined all our requests for interviews. The same applies to the different government departments that we approached for this story.

Devi Sankaree Govender (Carte Blanche presenter): "Eskom's rolling blackouts have affected the very core of our existence, our way of life, in fact our complete psyche. It's the worst crisis since 1994 and it's left South Africans frustrated, angry and despondent. All people want is to get back to their normal lives."

But at what cost?

All consumers of electricity, including large industrial users like the mines, are now required to cut down 10 percent on consumption. Parliament has been given tips on just how to accomplish this by the Minister of Minerals and Energy. She said people should switch off lights and go to bed earlier

Buyelwa Sonjica (Minister of Minerals and Energy): "As long as people do not whinge and whine this can be achieved and we are calling to all of those positive and progressive South Africans to support us."

If only it was as simple as that. Two months ago Eskom announced that they've ordered 45 million tonnes of coal to make up the short fall and they suggested a price increase of 20 percent for the next five years. But last week this went up to a gigantic 53 percent. And now we finally know the reason for this massive increase. The 45 million tonnes of coal, which Eskom has ordered, will be sold to them at world market prices and the 53 percent increase is urgently needed to pay for that.

Jacob Maroga (CEO Eskom): "If the cost of the elements that make up electricity increases, if it increases by a certain percentage, that percentage has to be reflected in the increase of electricity."

Devi: "To the man in the street the tariff increase may sound like an April Fools joke or some kind of bizarre economics coming out of Zimbabwe. But the reality is it's not. The fact is that Eskom's plans to ease the electricity crisis is going to cost the country billions and the consumer is going to foot the bill."

Load shedding is once again in full swing, but despite this critical situation Eskom has continued to export electricity to our neighbours this week.

This confidential document shows that on Wednesday the bulk of exported energy - around 1400MW - went to Swaziland and the Mozal Aluminium smelter in Mozambique.

The question is at what price?

Mike Schussler (Economist T-Sec): "I quite frankly think that the people in our neighbouring country that have got contracts that sell them electricity at the quarter of our price of our consumers says to me that there is a political interference with Eskom as well. And we are giving aid, by way of the electricity bill, to the countries around us."

Economist Mike Schussler says it is against the rules of the World Trade Organisation to sell anything cheaper in another country than you are selling it in your own.

Mike: "What Eskom is doing is that it is dumping electricity into our neighbouring countries, who in some cases they are paying us late, and in other cases they are paying very cheap rates for it. Eskom is full of beans about this and telling us all sorts of stories about why this is happening. The fact of the matter is we are selling electricity illegally cheaper into other countries."

To add insult to injury another confidential Eskom document revealed this week just how critical the crisis has become.

Six out of eight units, which were down at power stations around the country this week, were out because of coal shortages and low coal deliveries from the mines, while the remaining two were out because of poor quality coal. This resulted in a capacity loss of 1200MW. The consequence was the latest round of load shedding, but the country was told that this was due to pre-winter maintenance.

Mike: "One third of our capacity is just not there. It shows bad planning, bad maintenance, all these type of things."

The effect of the intended price increase will be profound with huge implications for economic growth and producer inflation. It will also hit disposable income and company profits, says economists Goolam Ballim

Goolam Ballim (Chief Economist, Standard Bank): "There's going to be multiple effects. Firstly, it is going to raise the general level of inflation in the country, because clearly electricity is a core input into production, not just into consumption in terms of residential living. So it will raise the cost of living and within the broad basket of staple items."

Mike: "It has the same effect of raising interest rates by 1.87 percent on the economy. Remember that this hits a large amount of people because not everybody is necessarily paying a bond, but everybody is paying electricity - 87 percent of our households today pay have electricity and that is going to hit far and wide."

To make things worse there's another extra we have to pay a two-cent per kilowatt/hour levy announced in February by Finance Minister Trevor Manual.

Trevor Manual (Minister of Finance): "A new levy will be introduced this year on the sale of electricity generated from non-renewable sources at the rate of two-cents per kilowatt/hour. It will be collected at source by the electricity generator and it is expected to raise about two billion rand in the first year and about four billion in the year thereafter."

And to top it all Eskom wants its latest increase to be backdated.

Mike: "I think Eskom is showing its bad planning again by thinking that it is going to get a backdated increase because that is going to put a lot of municipalities under a huge amount of fiscal strain."

Goolam: "Ideally, it would be more palatable if Eskom were to gradually smooth their increases and consumers were able to plan for it and better position their personal finances. But at the same time there is an urgency, there is a dearth of funding and Eskom needs to get the correct mix in terms of the overall funding programme. In this respect it is a race against time."

Eskom's expansion plans kicked off last August with the construction of the R80-billion Madupi (sic - Medupi) coal-fired power station in Limpopo, which will produce 4800MW when it comes on line in 2013.

During French President Nicolas Sarkozy recent state visit, Eskom signed a multi-billion rand deal for another coal-fired power station in Mpumalanga.

Devi: "Eskom plans on building more power stations over the next 20 years. They want to double the current electricity output to 80 000 MW. The estimated cost of this expansion will be R1300-billion, about 20 times more than the arms deal.

Dr Richard Young (Arms Deal Whistle-Blower): "R1300-billion is the kind of order of magnitude of the total Gross National Product of this country for a couple of years."

Dr Richard Young was the whistle blower who exposed massive corruption in the arms deal. Now semi retired, he questions the financial logic behind Eskom's proposed expansions.

Richard: "I can't see where we could possibly find the money over 20 years to fund the extra power generation capability. Even the R30-billion arms deal went to something like R60 or R70-billion. I know there isn't really even enough money to keep that equipment going. So where they are going find money from I really do not know."

Devi: "Well at least part of the expansion will be financed by the massive price hikes that Eskom wants enforced on the consumer. But will these increases affect all Eskom's customers alike? The simple answer is, no."

In Richards Bay many of the industrial plants have long term electricity supply contracts with Eskom and government, often excluding them from tariff hikes. Some of these contracts were signed many years ago at a time when the country had surplus energy.

But several deals, such as with BHP Billiton - which operates two aluminium smelters in Richards Bay - were concluded in the last ten years after government had been warned about the looming energy crisis. BHP Billiton's electricity tariff is linked to the aluminium price on the London Metals Exchange. This means the price is variable and because of the current high aluminium price they are paying more than before. But that's not the case with Billiton's Mozal smelter in Mozambique which is paying a fixed low tariff until 2012.

Devi: "Built-in confidentiality clauses prevent Eskom and clients like Billiton from revealing exactly how much they pay for their electricity. But those in the know say it's only about a quarter of what you and I pay for ours."

Mike: "They probably are only paying around 11c or 12c per kilowatt/hour. Compared to the average of industry, which will probably be around 17c per kilowatt/hour. Consumers are probably paying roughly between 41c and 45c per kilowatt/hour"

This, while the production cost of electricity is an estimated 17 cents per kilowatt/hour.

Devi: "That means someone is subsidising big industry's electricity. Guess who? You and I."

Richard: "The short fall is being made up by the tax-payers and the consumers."

So, it is possible that the South African consumer is subsidising the price of electricity that's paid by BHP Billiton, the world's largest diversified resources company. Electricity represents 40 percent of the cost of producing aluminium and probably the only reason the Billiton smelters are here is because they get electricity so cheaply, as Bauxite - the raw material used to make aluminium - is imported from Australia

But BHP Billiton can't be blamed. They made this deal on sound business principals some years ago, says Chairman of the Board, Dr Vincent Maphai.

[Speaking on TALK RADIO 702] Dr Vincent Maphai (CEO BHP Billiton): "The minute detail must be prepared to close down our business. We will not entertain that debate. We were born legitimately in the country and we operate legitimately. We cannot be treated as a problem. It is not our fault that there is a power shortage in the country."

Last week BHP Billiton terminated it's R2.4-billion annual business with Standard Bank when, according to news reports, a top executive suggested at a high level meeting that the smelters should shut down to save electricity.

Vincent: "We have rights, we acquired our power legitimately. When this country had more power than it knew what to do with - this is what we call stranded power - and when you have stranded power it means you are producing at a cost and it fizzles away. In fact by building those smelters at that time, what we have implicitly done is to subsidise other users in the country. Now when there is a problem you cannot come to us."

It is however questionable how Eskom and government could have been that short sighted considering they'd been warned that the country would run out of electricity in 2008.

Devi: "Why would we sign such deals?"

Richard: "I think the people within government, DTI, and the Department of Mineral and Energy Affairs, are really wet behind the ears when it comes to the immediate and the long term effects of entering into voodoo economic agreements - like the 25 year agreement."

BHP Billiton's two smelters in Richards Bay and its Mozal smelter in Mozambique are 100 percent powered by Eskom.

The smelters are Eskom's biggest industrial consumers of electricity and if the proposed Alcan smelter at Coega comes on line, the combined consumption will be just less than 4000MW *1. That's more than Johannesburg's daily electricity needs and almost 10 percent of the entire country's peak demand during winter.

The total capacity of the Madupi power station that is currently being built in Limpopo would be just enough to supply these smelters. *2 Some analysts suggest that if the smelters were to shut down there would be an immediate relief of the energy shortage. We would therefore be out of the critical Brown Stages and out of the hours of load shedding. But such a step may have far reaching implications.

Economist Goolam Ballim says it's disingenuous to simply compare consumer electricity prices with those of heavy industry and to infer that consumers are unfairly subsidising profits.

Goolam: "I think it is impractical. The sheer burden of terminating a contractual agreement with a firm of such scale, such turnover, would ultimately be a burden that falls on the taxpayer. You would then have to ask the taxpayer if they would be willing to take that penalty for some longer-term benefit. Then there are other additional perhaps subtle Cascadian consequences: if South African government appears to be unfriendly to investment and doesn't respect property rights or contractual agreements, how fertile an environment is South Africa to future business? So what may appear to be a sound short term decision over the longer term would effectively undermine investment potential and then in turn reduce the potential for higher growth."

Mike: "Just closing off the aluminium smelters would probably this year take away around R17.5-billion in exports because that is our aluminium exports in total."

Prof Patrick Bond is a Political Economist at the University of KwaZulu-Natal. He has a different opinion. He says very little is re-invested in South Africa and the profits are going elsewhere.

Prof Patrick Bond (Political Economist, Univ of KZN): "Now what is the outcome of that for an economist is what is called a balance of trade and payments, in other words, a current account deficient. Ours is at about eight percent of GDP - the highest in the country's modern history and about the highest in the world. It is making the rand very jumpy."

Closing down the smelters would therefore make sense to Patrick.

Prof Bond: "Look, it will look smart. If you look at what is going on with mining houses and big smelters, we are taking resources out of the ground, they are non-renewable, coal, gold, platinum, titanium, diamonds. Now when you take the resources out of the ground you don't have them anymore. Our children won't have those resources. Now our economists will say we are losing GDP because we are slowing down extraction. That is not really true because when you take the full environmental costs - the fact that those are natural assets that are taken out - they should be debited against our national natural wealth. And they are not. That is the problem with economists' logic. They can't think through the full environmental costing."

Devi: "What would be the most responsible thing for the South African government to do now?"

Prof Bond: "To shut it down
and to really rethink what those relationships were all about that made us so fossil fuel addicted. This used to be controversial before January. Even in his budget speech Trevor Manuel announced that we have really been on an apartheid induced, and post-apartheid amplified, addiction to cheap energy for export purposes with very few jobs and the profits going abroad. It is not the right way to go."

The price tag of load shedding should also be considered. It's estimated that the economy loses between one and two billion rand a day when Eskom cuts the power.

Richard: "There are 250 working days in a year. So Brown Stage One could cause losses to the country of R250-billion in a year. Whereas Brown Stage Two could cause double that. The damage, I won't say it is permanent for forever and a day and the next thousand years. But certainly it is permanent in terms of our life time."

Devi: "A few days ago BHP Billiton announced that they were scaling down their operations at their Bayside smelter and that about 600 employees were going to be retrenched."

But seemingly not for the reasons Patrick and Richard argue. The company says it is unsustainable to operate their three smelters on the 10 percent reduction demanded by Eskom. They have therefore decided to take the bulk of the power cut at their Bayside smelter. Meanwhile, BHP Billiton has offered to help Eskom rebuild its depleted coal stocks as the company's coal operations have been minimally affected by the energy crisis. The question is at what price?

Mike: "One of the reasons that Eskom is asking for a price hike is because it is the same company that is selling them the coal that is receiving electricity their electricity at a very cheap rate at the other end. So for them it must be a win/win situation. They put coal into the machine and they buy it cheaper at the other end."

These huge coal stockpiles are nowhere near Eskom's embattled power stations. This is the Richards Bay Coal Terminal and these vast mountains of coal are awaiting export. South African coal is in high demand across the world and we export to Europe, the Far East, India, Africa and South America. The smooth operation here is a far cry from Eskom's disastrous ventures with BEE coal transporters, which we exposed in January. The irony is that if Eskom had managed its coal supply as efficiently as this, the country's energy crisis could have been avoided.

Richard: "One of the recommendations that I am making publicly is that there needs to be a forensic audit, done by an independent body into the whole reality. It is beyond any reasonable doubt that Eskom is a public company - they are founded (sic - funded) by the government and by our tax."

With acknowledgements to MNet and Carte Blanche.

*1       Actually, when the Alcan smelter at Coega comes on line, the combined consumption will be more than 4 000 MW.

2 700 + 1 355 = 4 055 MW.

*2      In effect, this means that the South African taxpayer and Eskom electricity consumer is going to spend R80 billion to fund the continued operation of Billiton's and Alcan's aluminium smelters *3.

*3      Billiton's and Alcan's aluminium smelters will contribute about R5 billion per year to the South African economy.

So it will take at least 16 years to pay for the Medupi Power Station at current values.

But in the meantime, Medupi will come on stream in 2013 and Alcan Coega will come on stream in 2010.

So the country will have to endure another six years of load dumping and it will get very seriously worse when Alcan Coega start using its initial 650 MW of power in 2010 and the full 1 355 MW soon thereafter.

Does this make economic sense?

Yes, after dancing around the embers all night while signing the Alec Erwin war anthem and taking in a few giant tokes of best West Indian weed all the while jabbing some short sharp sticks into a few sweet potatoes all dressed up to look a like the average South African taxpayer.