It’s “let’s make a deal” at Eskom as users negotiate their own separate power agreements

Does anyone at Eskom and Nersa have any idea on how to run a utility? It seems that the parastatal companies are making up it along with way without a consistent policy.

Eskom has gone public with its plans to raise power rates 19.9% next fiscal year, a move that is being fought by everyone. While Eskom says it needs the money, the almost 20% hike would kill domestic industry, including the important mining sector. While the increase will likely to negotiated down, that is only part of the problem.

Nersa quietly approved Ferroglobe’s proposal for a two-year incentive program for discounted power for the company’s two silicon smelters, Polokwane and eMalaheni. The details have yet to be released but Eskom said it would save about 3,600 jobs.

Under the terms of the Silicon Smelters’ deal, Eskom has a separate and different agreement with each of the smelters. The minimum price in each case is in excess of what it refers to as the short-run marginal cost, which is based on the extra cost required to run four of Eskom’s most costly coal-fired power stations plus a safety margin.

The tariff could fluctuate depending on several variables, the main ones being volume of electricity used and time of use, i.e., it’s cheaper a night.

Eskom is allowed to switch off or restrict the supply to Silicon Smelters to protect the electricity system or avoid interruptions to other clients. The plants Silicon Smelters would always pay at least the minimum price, recovering the short-run marginal cost plus a contribution to its fixed costs.

At the end of each month reconciliation is done and the company gets a rebate according to the special pricing arrangement.

Now South32 wants to begin negotiations cover its Hillside aluminum smelter in South Africa. That plant has a sliding scale contract, i.e., it moves up and down with the LME aluminum price. Eskom seems willing to talk, and suggested a rand-based fixed energy contract.

So, it’s like “let’s make a deal” and now every large energy user will be trying to negotiate its own separate deal with Eskom. What a mess.

The problem is that Eskom has huge financial problems (its liquidity reserves are expected to drop to R1.2-billion from its own target liquidity of R20-billion, coupled with excess generating capacity and a dramatic drop in demand caused mostly by the extraordinary power price increases imposed gy Eskom over the last few years.

So in a nutshell, Eskom has more power because it has contributed the drop in business activity with much higher prices. This, in turn, means less business activity which means more excess power and higher costs for the remaining consumers.

Now that’s the way to run a business – into the ground!


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