Eskom defends ‘secret’ R70 billion contract

Eskom defended its 10-year deal giving Hillside Aluminium a discount worth R10 billion a year, saying the smelter’s stable, high-power use supports the grid and contributes to fixed costs.

However, critics argue that the power utility did not conduct a proper analysis and that cheaper alternatives could save the economy billions of rands annually.

Recently, the terms of a negotiated pricing agreement (NPA) between Eskom and South32’s Hillside Aluminium smelter were released by Open Secrets.

Located in Richards Bay, KwaZulu-Natal, Hillside is the only primary aluminium smelter in South Africa and one of the largest in the world.

The smelter is also one of Eskom’s biggest customers, and accounts for 5.6% of the power utility’s electricity sales.

Under its 10-year NPA, which Nersa approved in 2021, Hillside receives a substantial discount on Eskom electricity, amounting to approximately 50% for the ten-year term of the contract.

For the 2025/26 financial year, the discount’s value amounts to approximately R10 billion annually. Following the release of the NPA’s terms, Meridian Economics released an analysis on Hillside.

This report argued that although Hillside offers an interruptibility service vital for grid stability, the same result could be achieved through battery storage, which would be significantly cheaper, at less than R3 billion per year.

This means that Hillside is currently receiving a net discount of around R7 billion a year, a cost which other paying consumers and businesses have to make up for.

The NPA also state that the tariff Hillside pays must increase by the Headline Producer Price Index (PPI) for Final Manufactured Goods plus 1.25% annually.

In contrast, other Eskom customers were hit with a 12.74% price increase in 2025/2026. This is lower than the 36.1% increase Eskom asked for initially.

Eskom responds

Eskom told Daily Investor that Hillside Aluminium applied for the NPA in question when its previous special pricing agreement neared its expiration date.

“Nersa granted approval of the NPA following due diligence, public consultation, and compliance with its governance framework,” the power utility said.

“A globally competitive tariff that considered the sustainability of the Hillside smelter and Eskom’s cost of supply was structured.”

It said that the agreement complies with the provisions of the Interim Long-term Negotiated Pricing Agreement Framework issued by the Department of Mineral Resources and Energy (DMRE)/ Department of Electricity and Energy (DEE).

As Eskom’s largest industrial customer, Hillside consumes ~10.3 TWh of electricity annually, approximately 5% of Eskom’s sales.

The smelter runs almost constantly at full power, at a high load factor of >0.99, making it a stable, round-the-clock energy user.

“The energy consumed by the Hillside smelter is equivalent to approximately six large ferrochrome smelters or approximately 28 average key industrial customers (mines and industrial).”

The Hillside smelter tariff approximates the higher end of electricity prices that aluminium smelters globally pay and covers all applicable variable costs, with an additional contribution made to fixed costs.

“Several financial, economic and technical benefits accrue due to the large smelter base load consumption,” the utility explained.

The lack of transparency surrounding the agreement with Hillside was another major concern highlighted by Meridian’s report.

“Eskom does not disclose the Electricity Supply Agreements signed with customers as these are considered confidential and commercially sensitive.”

Without Hillside’s contributions to fixed costs, Eskom said these expenses would have to be passed on to South Africans, increasing other consumer prices.

Interestingly, Meridian’s report also addressed this argument. To justify this R7 billion net discount, Hillside will have to contribute more to the economy than other customers would have if they had received electricity instead.

The argument is that if the country does not grant this discount to the smelter, the country would lose out entirely on Hillside’s economic contribution. However, Meridian called this reasoning “absurd”.

They said a better comparison would be to ask whether the economic good Hillside creates with its energy use is greater than the value other businesses could create if they had received the power instead.

Most other businesses, existing and new, require far less electricity than Hillside per unit of economic contribution, but may they be equally reliant on power to survive.

However, Meridian explained that this inquiry was absent in Eskom’s application and Nersa’s decision-making process.

Nersa simply concluded that if Hillside were to close, the economy would lose R70 billion, and the existing customer base could not absorb the discounted power.