Electricity tariffs: Billiton tells its side

Benefits amounted to massive subsidy….

Mhkwanazi BillitonThe cumulative benefit to Eskom as a result of BHP Billiton buying out Eskom’s excess capacity of electricity generated over the 14 years until the recent 2008 crisis amounted to a figure in excess of R26bn, Dr Xolani Mkhwanazi, chairman of the South African company, told parliamentarians of the trade and industry committee.

What is more, he said, when Eskom’s near collapse occurred in January that year due to heavy rains, flooded collieries and low coal supplies, BHP Billiton mothballed for some time its Bayside aluminium plant with no compensation and with the purpose in mind of preventing further national blackouts.

Protecting grid together

The company now works, he said, on an ongoing basis with Eskom, both managing and protecting the grid by adjusting demand from its Bayside and Hillside aluminium smelters. No compensation is asked for

In answer to MPs further questions on this subject, he said, “We know we are operating in an environment where there are currently conditions of restraint that have to be exercised.”   He repeated again that such restraints were carried out as a joint exercise to protect the grid as a whole.

These facts were made public to parliamentarians this week after months of questioning by MPs during numerous portfolio committee meetings at which Eskom said it could not discuss the special rates negotiated with large power users, known as NPAs or negotiated power agreements, particularly that which had been negotiated some years ago with BHP Billiton.

Shielding Billiton

Dr Mkhwanazi confirmed that agreements in the past between BHP Billiton and Eskom were related to the international price of aluminium to the Rand/Dollar exchange rate, thus shielding BHP Billiton from local market related problems since the formula when applied meant that in times of high aluminium on a weak rand, lower prices are paid for power.

It had to be borne in mind that such agreements were conducted when Eskom was in highly favourable reserve margin situation, he said. A new NPA has now been struck with BHP Billiton, Dr Mkhwanazi confirmed under questioning.

When asked by opposition ID member Lance Greyling from the energy portfolio committee, who attended the meeting as a guest MP, whether under the new tariff arrangements the contract was still linked as before on a risk sharing basis based on the global price of aluminium, thus shielding BHP Billiton, Dr Mkhwanazi at first did not answer the question

When pushed again on the subject in a second round of questioning, Dr Mkhwanazi replied, “Yes”.

Why Mozambique?

When asked why BHP Billiton had gone into aluminium smelting at Mozal in  Mozambique when Richards Bay appeared undercapitalized at one point, Dr Mkhwanazi pointed to the very advantageous incentives offered by that country some years shortly after peace had returned to the territory.

Lucas Msimanga, asset president, BHP Billiton Aluminium, said that the group’s operations covered three main resources – coal, aluminium and manganese.

Manganese was centred around Hotazel in the Northern Cape and the larger reserves of the Mamwatan open-cut and Wessels underground operations, both in the Kalahari.

It was a fact that 80% of the world’s high grades of manganese existed in South Africa but, said Msimanga, both were in remote situations thus involving high transport cost. Consequently, said Msimanga South Africa had about only 11% of the world market based on pricing factors.

BHP Billiton had five collieries and supplied 25% of Eskom’s coal.

Aluminium eats electricity

On aluminium operations, he said the group was the eighth largest aluminium producer in the world and the two smelters were originally constructed to “absorb the excess generation capacity of Eskom in the late 1980s when Eskom had a reserve margin of 40%.”

Msimanga reminded parliamentarians that aluminium was little more than solid electricity, the furnaces taking calcined petroleum coke, mixed with molten pitch to 1100ºC over 21 days, the resulted aluminium anodes going through electrolytic reduction processing “pots” for a further 27 days. To be in aluminium industry, he said, you were deep into the energy industry, bearing in mind BHP Billiton was also a coal producer.

In manganese, the M14 BHP Billiton furnace was probably the largest in the world and exercises currently being carried using CO gas to the onsite power plant raising self-sufficiency in energy was an important exercise at present being conducted. This was aimed at a hoped for reduction in CO2 footprint.

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