MAC: Mines and Communities

Eskom's 'Sweetheart Deals'

Published by MAC on 2010-03-10
Source: Cape Business News & Huffington Post

Arguments around power shortages in South Africa have been raging for some time (with the mining industry grumbling over power outages). At the same time South Africa is Africa's heaviest polluter due to its dependence on coal-fired electricity. (See:

However this does not justify the World Bank's loan to build a massive coal plant in South Africa. (See the accompanying article: Aside from good arguments on the development of renewables, it also highlights the generous long-term deals that mining companies like BHP Billiton secured for their smelters, at the expense of South Africa's population.

Eskom's 'Sweetheart Deals'

Cape Business News

3 March 2010

THE Cape Chamber of Commerce says it would like to see a full and transparent investigation into Eskom's "sweetheart deals" with the aluminium smelting industry.

"It has become clear that South African consumers are subsidising the cheap electricity used by the smelters and we can no longer afford to do so," said Mr Albert Schuitmaker, Acting Director of the Chamber.

"The smelters were the main reason for Eskom's R10 billion loss last year and we know that Eskom has failed to deal with the problem, despite an instruction from the Eskom Board to the former CEO to renegotiate these contracts."

Eskom has been secretive about the deals and has refused to disclose details, claiming that they are confidential and that the 30 to 40-year contracts were negotiated when there was surplus generating capacity.

The BHP Billiton smelters import bauxite aluminium ore from Australia and use subsidised Eskom electricity in arc furnaces to produce the metal which is then exported. In effect, South Africa is exporting electricity.

Mr Schuitmaker said the smelters sustained mining jobs in Australia and manufacturing jobs in the countries which bought the aluminium, but the question that had to be answered was how many jobs they sustained in South Africa and whether the electricity could not be used more productively in local mining and industry.

Eskom's claim that the deals were made in the eighties is not correct. The small Bayside smelter at Richards Bay dates back to 1973. Construction of the Hillside smelter, also at Richards Bay began in 1993 and first metal was cast in 1995.

By this time surplus capacity was shrinking and in 1998 Eskom applied to the government for permission to build a new power station as the country would need new capacity by 2006. The application was approved by Nersa but turned down by the government. Former President Thabo Mbeki later apologised for the mistake.

Despite this, Eskom agreed to supply electricity to another Billiton project in Mozambique. The arrangement was a more complicated as South Africa would also import hydro electric power from Mozambique but Eskom supplied the electricity to Mozal One and then Mozal Two at prices we are now subsidising.

To make matters worse, Eskom agreed to supply yet more electricity to the Hillside smelter and in 2003 production at the smelter was increased by 60 percent. In addition it guaranteed power for yet another smelter as part of the Coega project near Port Elizabeth.

"What is almost impossible to understand is how Eskom could have entered into 30 and 40 year contracts when it knew the surplus would disappear and the country would need new power stations by 2006," Mr Schuitmaker said.

If the smelters were closed down there would be penalties, but an additional 1 200 MW of power would become instantly available and that would be like bringing a new power station on line.

Mr Schuitmaker said there was a need for a formal inquiry into the smelter contracts and other possible sweetheart deals. "We need to know whether any corruption was involved and how we can end or renegotiate the contracts. We cannot tolerate a situation where some Eskom customers are treated better than others."

World bank gives South Africa Lumps of Coal

By Lori Pottinger, The Huffington Post

9th March 2010

In case you didn't catch it, the World Bank's top official for Africa just thumbed her nose at the dozens of renewable energy companies lining up to build clean energy in Africa's dirtiest economy.

Obiageli Ezekwesili, the Bank's Vice President for Africa, defended a controversial $3.75-billion loan to build a massive coal plant in South Africa with this head-in-the-sand statement: "There is no viable alternative to safeguard South Africa's energy security at this particular time."

The quote came in an article titled (without irony) "Africa Ready for Energy Transformation." With that kind of transformation, the continent can look forward to many more decades of playing catch-up with the rest of the world.

Maybe Ms. Ezekwesili missed the news that South Africa could get 10-20% of its electricity from wind power in the short term (and up to 70% over time), by harvesting some of its 50,000 MW of potential (it currently has just one 5MW commercial wind farm in place). Or that the sunny nation also has huge potential for solar (one study shows 547 gigawatts in potential for grid-based concentrating solar plants, not to mention equally impressive potential for solar water heating and solar PV).

Writes a local columnist, "Research shows that in conjunction with energy efficiency measures, 75% our electricity could be generated by exploiting renewable energy sources by 2050, slashing our CO2 emissions by 54% below 1990 levels and making massive strides towards avoiding catastrophic climate change." But the national utility, Eskom, has been despairingly slow to move away from coal to embrace a green energy future.

Says South African professor Patrick Bond: "South Africa's five-fold increase in CO2 emissions since 1950 and 20% increase during the 1990s, can largely be blamed upon the attempt by state electricity company Eskom, the mining houses (led by Anglo American) and huge metals smelters (especially BHP Billiton) to brag of the world's cheapest electricity. Emitting 20 times the carbon tonnage per unit of economic output per person than even the United States, South African capital's reliance upon fossil fuels is scandalous."

Says extractive-industries activist Bobby Peek, of the South African group groundWork: "The South African government cannot continue to give away electricity below cost, to fire smelters which have little linkage to the South African economy. If the World Bank loan goes through, poor South Africans will have to bear the burden of Eskom's debt, and climate change will intensify."

It's not just activists who are up in arms: the Cape Town Chamber of Commerce is calling for a national investigation into Eskom's "sweetheart deals" for big industrial energy users at the expense of everyone else. Unions, too, have recently joined a coalition calling on the World Bank to drop the project.

The World Bank, whose job is to fund poverty alleviation, not cheap power for aluminum smelters, talks of Africa's energy sector "transforming" itself the way the telecoms industry did - a truly transformative sector-wide change that brought affordable mobile phone service across the continent. But the energy sector cannot transform itself if it looks only to megaprojects for salvation. The telecoms industry was a bottom-up transformation, one that bypassed big bureaucracies to create decentralized service one could buy in small packages, as needed. As long as Eskom and other African utilities are focusing more on mega-industries' needs, and giving them subsidized rates to keep them happy, there will be no transformation, nor a significant change in the ranks of the unconnected. Africa definitely needs an energy revolution, but it needs to focus on people power first.

Meanwhile, renewable energy developers are waiting in the wings for Eskom to show them the money in the form of power purchase agreements. Wind power developer Eddie O'Connor told Engineering News that South Africa was "pregnant with potential".

I guess the World Bank won't be the one to deliver that baby.

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