Secret Eskom deals 

Eskom has several secret deals with large mining companies, including South32 and Glencore, to supply their smelters in South Africa with extremely cheap electricity. 

This is while ordinary consumers must deal with repeated double-digit increases as Eskom seeks to narrow its revenue shortfall. 

These deals were first promoted in the early 1990s after Eskom had completed a decades-long build programme to provide South Africa with cheap, reliable electricity. 

One problem with this programme was that it produced significant amounts of excess electricity, which did not generate any revenue for Eskom. 

As a solution, the utility entered into agreements with smelters, its largest industrial customers, to get them to use this excess electricity. 

As a sweetener to encourage smelters to sign up, the electricity was sold to them at an extremely low, fixed price on a years-long contract. 

These contracts are typically renegotiated every ten years or so, with South32’s latest agreement being signed in 2021. South32 makes up 5% of Eskom’s total electricity sales. 

While these contracts are entirely legal and approved by Nersa, the details are often hidden. 

“The only thing we know about them is that we are not allowed to know what they are,” executive director at JustShare Travey Davies told 702. 

“We are not allowed to know the pricing that has been negotiated between the smelters and Eskom.” 

This is despite numerous applications under the Freedom of Information Programme and legal battles with Eskom. 

“There is no reason for this to be kept secret from citizens in whose public interest the information is in,” Davies said. 

The previous deal between South32 and Eskom set the cost of electricity for the company’s smelters at only 22 cents/kWh, which is significantly cheaper than electricity for ordinary consumers and below Eskom’s production cost. 

At full capacity, South32’s Hillside and Mozal aluminium smelters’ consumption exceeds the full output of Koeberg. 

At the time of the deal being signed, South32 said the tariff is South African rand-based with a rate of escalation linked to the South Africa Producer Price Index. 

The new agreement replaced some contracts that were US dollar-based and linked to the aluminium price on the London Metals Exchange. 

These electricity deals are crucial to ensuring the smelter industry in South Africa remains globally competitive, South32 said. 

These smelters are also a vital source of employment for South Africans, with Hillside employing 1,300 people alone. 

However, without the full information regarding the deal, it is difficult to assess whether it is economically beneficial to South Africa or not. 

Another concern is that most of the profit of these smelters, owned by South32 and Glencore, goes out of South Africa to international shareholders along with the processed products. 

Hillside was the largest revenue source for South32 in the last financial year, contributing R34 billion in revenue. 

In effect, Eskom and South32 have exported South African energy at a time when the country has been experiencing a significant electricity shortfall. 

The aluminium produced at Hillside and Mozal is made from the raw product alumina, which is imported from Australia for processing. 

Under the new agreement, the smelters are not exempt from load-reduction, whereby Eskom reduces the amount of electricity available to these key consumers to avoid cutting them off completely. 

In the early 2010s, when Eskom and South32 were forced to disclose the terms of the previous deal, the utility applied to Nersa to set aside the long-standing price agreements. 

Eskom argued the grid was under pressure. It no longer had surplus capacity and faced a financial crisis. Nersa refused its request. 

South32-competitor RioTinto said earlier this year that a significant electricity tariff hike threaten the viability of smelting in South Africa. 

“You’ll see smelters closing down in South Africa if not all of them. And you will see entire communities going into strife. Even big industrial hubs,” said Werner Duvenhage, MD for Rio Tinto Iron and Titanium (RTIT) Africa Operations