March 22, 2013 / 4:30 PM / 5 years ago

UPDATE 2-S.Africa's Eskom asks regulator to review BHP power deal

* BHP power tariff is half the production cost

* Eskom confirms BHP pays less

* Regulator move follows failure to renegotiation price

By Agnieszka Flak

JOHANNESBURG, March 22 (Reuters) - South African power utility Eskom has asked the national energy regulator to review a preferential deal it has with BHP Billiton that allows its biggest customer to purchase electricity at just over half the cost of production.

The state-run utility, which needs to generate cash to build new power stations to meet rising demand in Africa’s biggest economy, has been trying to renegotiate the long-term deal with BHP since 2009.

Under the deal, which runs until 2028, BHP pays 23 South African cents per kilowatt hour (kWh) compared to the 41 cents it costs to produce, the Afrikaans-language Beeld newspaper said on Friday.

That compares to the typical rate charged to factories of 1.61 rand and 1.40 rand for households, Beeld reported.

BHP was not immediately available to comment on the details of the contract, whose details were released this week after a court ruled in favour of a public information request by Beeld.

“What BHP Billiton pays is clearly less than the average paid by the other big mining and industrial customers, which is between 56-58 cents (per kWh) for this financial year,” Eskom spokeswoman Hilary Joffe said.

She declined to confirm the specific amounts paid by BHP but said South Africa’s energy regulator would be taking up the case after Eskom’s failure to directly renegotiate the contracts.

The National Energy Regulator of South Africa (NERSA) declined to comment directly on the report but said a public hearing into the BHP contracts would be held in late April. It would announce its intended course of action only after that.

The contracts with BHP, which consumes 9 percent of Eskom’s power output, date from the early 1990s when there was abundant supply in South Africa, the legacy of a government policy of underpricing power to attract industry.

The deals contributed to a loss of 9.7 billion rand ($1.04 billion) in 2009. In subsequent years, accounting losses from these derivative contracts, which are linked to the price of aluminium and the rand/dollar exchange rate, have been smaller.

Eskom has secured a change of a similar deal it had with Anglo American’s zinc Scorpion mine in Namibia.

The BHP contracts cover power to its Hillside and Bayside aluminium smelters in South Africa and its Mozal unit in neighbouring Mozambique. Beeld said Hillside was charged 22.65 cents per kWh and Mozal 36 cents.

Eskom has been granted annual power tariff hikes of 8 percent over the next five years, following increases of around 25 percent in recent years, to raise cash to build new power stations.

The increases have fuelled criticism from industry and consumers who say they should not bear the burden of fast-rising electricity costs when BHP pays a fraction of the cost price.

South Africa is facing potential electricity shortages as its reserve margins narrow ahead of the southern hemisphere’s winter from June to August, when usage rises.

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