TV Station	MNet
Program	Carte Blanche
Date	2008-04-06
Genre	Business and Financial
Presenter	Devi Sankaree Govender
Web Link	www.mnet.co.za

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 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*1

 comes on line, the combined consumption

will be just less than 4000MW. 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. 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 by the

government and by our tax."

With acknowledgements to Carte Blanche.

*1      The proposed Alcan

smelter at Coega was to be the anchor tenant.

The proposed Alcan smelter at Coega was part of the NIP offsets of the

Arms Deal.

Not only did it not come about because it was a bullshit NIP offset in

every which way, but it would have gobbled another 2 000 MW of power.

That would have caused another series of catastrophic loadsheddings after

2008 until the present, indeed until Medupi comes online in a year or

two's time.

Effectively, if Coega had happened Eskom would need an entire new 4 500

MW coal fuelled power station to supply Billiton's aluminium smelters.

As it is, Billiton's three existing aluminium smelters (Bayside, Hillside

and Mozal) already gobble up about half the capacity of a modern large

coal-fired power station.

By way of comparison, Billiton's three existing aluminium smelters are

using about the total nominal output of the Koeberg Nuclear Power Station

of 1 800 MW.

Today it would cost some R150 billion to build a new nuclear power

station of 2 000 MW. Maybe more. 

It's simple: Eskom must immediately stop supplying power to Billiton at

anything less than standard price and without compromising grid

stability.

Then Billiton must build its own nuclear power station(s).

That'll give its beancounters and some migraines.

As well as its project managers.

And don't use our coal to make that Aussie aluminium.